Tuesday’s Japan Times reports new data showing Tokyo’s first surge in land prices in 13 years. The average land price along select major streets in Tokyo grew 0.4 percent from a year before. (We’ll have to excuse their referring to 0.4% as a surge; it has been a long time for them.)
Prime downtown tracts did better. Tokyo’s ritzy Ginza district was 9.9 percent higher than a year ago, but still 60 percent lower than its peak in 1992.
Nationwide, the average land price fell 3.4 percent, its 13th straight decline. Still, the margin of decline was the smallest since 1993, when the 13-year slide began.
Japan’s National Tax Agency assesses land values at 410,000 locations across Japan every year to determine the “roadside land price,” which is used to calculate inheritance and gift taxes each year.
The end of falling land prices matches the things I have learned from my confidential advisor in Japan, who I will refer to as Fibonaci. Fibonaci told me some months ago that real estate markets were starting to clear and the fire sale was over. Fibonaci also tells me Japanese companies are beginning to gush cash flow which will show up as rising dividends. Dividends? In Japan? I would not bet against Fibonaci.
The reason this is such a big deal for Japan is that economists do not understand real interest rates. Most economists calculate the real rate by subtracting a CPI inflation rate from short term borrowing costs. This would produce a number for Japan of 2-3% for the past 13 years, which does not appear burdensome.
The right way to calculate real rates, as Keynes understood in his brilliant Chapter 17 on “Own Rates” of his General theory, is to calculate the carrying cost of a balance sheet. Most companies hold tangible, fixed, assets and have financial liabilities. The cost of carrying their balance sheet is their borrowing cost less the weighted average inflation (including depreciation) of their assets, primarily land and equipment. This calculation for Japan shows a real rate of about 1000 basis points over the past 13 years, the reason Japan was mired in recession. You will find papers n this subject in the archives on our website www.rutledgecapital.com.
A company in Japan or elsewhere cannot begin to make a profit from selling their products uintil they have paid the rent on their balance sheet. The end of property deflation Japan represents a massive decline in real interest rates, good for Japanese growth, profits, and yes Fibonaci, even dividends.
I own a position in EWJ, the Japan ETF.
JR
Dear Dr. John,
If property deflation has ended in Japan, and banks are again creating capital (as discussed in The Economist magazine of Sept 10/05), isn’t the best way to play the Japanese recovery by buying their banks, for instance as ADRs, like (ticker), IX, NIS, and MTU, rather than EWJ?
JW
Jay,
I like the Japanese banks better than the bit Japanese export names because the real strength in Japan is in the domestic market, which tend to be smaller companies. Also, don’t forget the utilities. Big cash flow, huge real estate holdings, and the beginnings of pressure to pay dividends.
JR
Pcyhuang,
I recently finished reading the book (above). It compleatly contradicted the Weekly Standard article (which I had just finished reading) about the Chineses threat to Asia and the USA. In the book, the arthor said that his report made the rounds of Wall Streat brokers.
Apart from his China conclusion. He said he arrived at his general conclusion, starting first from a military point of view, then ending up with a economic point of view. (chain of logic being first military then economic). I arrived at the same conclusion going from an economic point of view to a military point of view. (chain of logic being economic then military).
I was hoping for some feed back on the China militatry Threat senario. One persons conclusion between the Book and the Article, is that the book is right EXCEPT for the conclusions about China. (China being a non-military threat).
In my comment, I did say that it was off the subject.
If you have any thoughts on the subject I would like to hear them.
Jim:
How does your posted article on “China as a military apponent” has anything to do with the JM’s theme on “Japan’s corporate recovery”? But my point on the low international freight rate to Japan definitely is related to Japan’s state of properity, for if Japan is on the path of recovery, the corporate sector will definitely increase its volume of trade with the rest of the world and therfore higher freight rate to Japan.
If your observation about Japan’s corporate recovery is correct, how do reconcile the fact that on 2005 08/01/05 ocean freight from gulf to Japan was back to $34 a ton, which is the lowest rate in almost 30 months.
Moreover, if you look at International Baltic shipping index versus the CRB index, oil, gold, copper, or soybean, you would realize that an up turn in the shipping index is imminent.
Disclosure: I own 2603.tw (Evergreen Marine) and 2609.tw (Yang Ming Marine Transport).
John,
This is off the subject, delete it if you wish.
Recently I read “The Pentagons New Map” by Thomas Barnett. I assume that you read his report by the same name.
The part in interest is -China as a military apponent-.
This, Weekly Standard article contradics it.
http://www.weeklystandard.com/Content/Public/Articles/000/000/005/905gmdoa.asp
What are your thoughts on this? Jim.
Thanks for the writeup on Japan. I think you meant the Japanese ETF is EWJ. EWY is Korea.
I also have a recently acquired position in Japan ETF, but the symbol I have is EWJ, not EWY. I think EWY may be Korea. Sorry if I’m mistaken.
I have been wondering whether, on a cash-flow basis, Japanese income properties fell to bargain prices over the last 13 or 14 years.
Do apartments and commercial properties now yield strong cash flows? Or did it take 13 years for property to fall to a roughly zero cash flow level?
If the Japanese real estate bubble could be an analogy to that in the US today, it would be interesting to know where it bottomed out, cash flow wise.