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Japan is at the critical juncture of breaking out from its three decades of stagnation. Nominal growth is returning. The outlook is not set in stone, but the current wage-price dynamics look promising and supportive. We expect any policy adjustments during this transition period to be slow and steady.

Globally, inflation spikes over the last 12-18 months, have triggered aggressive policy reactions and a record pace of interest rate hikes. Investors fear the same for Japan. The sense of caution in the real estate market is escalating with every new tweak to the Bank of Japan’s (BoJ) yield curve control (YCC) and as we approach a potential exit from the negative interest rate policy (NIRP) in 2024.

However, we think the policy outlook needs to be put in context. We are entering a “mild nominal growth” era after three decades of “stagnation” led by an improving inflationary outlook. This is a good thing and should be cheered. The premise of any potential policy normalization should be to stabilize this transition and not to jeopardize it.

Nonetheless, the risks of a premature tightening have seemingly increased in this “higher-for-longer” interest rate environment, which is driving JPY weakness and ‘bad’ inflation. The BoJ is currently faced with an almost impossible task of fighting both deflation and inflation at the same time. So far, it has skillfully adapted the YCC to ensure continuity. Intervention by the Ministry of Finance has also helped to buy time.

The key questions real estate investors often seek answers to are the timing, pace and extent of any interest rate hikes. This research insight for the real estate markets in Japan addresses the ‘higher-for-longer' interest rate debate, looks at the macro-economic environment in perspective, the impact on cap rates and the potential upsides.