Nicholas Spiro

The View | Why messy end to negative interest rates won’t dent Japan’s appeal

Japan’s real estate industry is not immune to the fallout from ending ultra-loose policy, but its market’s appeal must not be underestimated

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The sun goes down over homes in Hiratsuka, Kanagawa prefecture, Japan, on August 4. While Japan’s real estate market has its issues, the country’s unique strengths and lack of a viable alternative in Asia will continue to bolster its appeal to investors. Photo: Bloomberg

Nicholas Spiro

Published: 4:30pm, 12 Aug 2024

When Japan ended the era of negative interest rates in March, it was clear a rocky road laid in wait. While other leading central banks had tightened monetary policy since 2022 to counter the surge in inflation, the Bank of Japan (BOJ) maintained its ultra-loose policy, determined to ensure inflation become entrenched in an economy that had suffered decades of deflation and stagnation.

Even when the BOJ finally called time on negative rates, it went to great lengths to signal that the shift marked the beginning of a normalisation of policy as opposed to a full-blown tightening campaign.

Even baby steps have proved difficult, though. Just two days before weaker-than-expected data on the US labour market convinced investors the US Federal Reserve would have to reduce borrowing costs dramatically, a rise in the BOJ’s benchmark rate to 0.25 per cent on July 31 accentuated the divergence between Japanese and US policy.

This fuelled a sharp rally in the yen, causing a disorderly unwinding of the yen-funded “carry trade” and contributing to a staggering 20 per cent decline in the Topix index, one of Japan’s two main equity gauges, in the first three trading sessions in August. The meltdown in Japanese stocks caused an eruption of volatility in global equity markets, heightening concerns over the BOJ’s exit from negative rates.

Japan’s real estate industry is not immune to the fallout from the move away from ultra-loose policy. In the residential market, about 75 per cent of mortgages are floating-rate loans tied to the Tokyo Interbank Offered Rate, which fluctuates according to market conditions. Mitsubishi UFG Financial Group, Japan’s biggest bank, said it plans to raise its short-term prime rate for home loans for the first time in 17 years, with other lenders expected to follow suit.

Monthly mortgage payments in Japan can only be reset once every five years, delaying the pain for mortgage holders. However, the signalling effect of higher rates in an economy where consumer confidence has been hit by persistent price rises and the yen’s 27 per cent fall against the US dollar since the start of 2022 poses a significant risk.