Friday, March 26, 1999
In the early 1980s, the conventional Japanese wisdom was that land prices never fell. Indeed, increases were believed to so inevitable that land was thought to make even better collateral for loans than it did in other countries. The "bubble" period of the late 1980s did nothing to dissuade believers in this philosophy, but the collapse of the bubble in the early 1990s robbed the argument of its inevitability. Land prices could, and did, fall significantly during this period.
What no one suspected was that they would continue to fall for the rest of the decade, but the recent release by the National Land Agency of data on land prices as of January 1 of this year raises the possibility that Japanese land could be worth less in the early years of the next millennium than it was in the 1980s before the bubble. According to this survey, land of all types fell an average of 4.6 percent from a year earlier, the eighth straight annual drop and actually an acceleration in the rate of decline from the 2.4 percent decrease registered in 1997. With the latest decline, land prices in Japan's three largest cities (Tokyo, Osaka and Nagoya) returned to 1983 levels.
The data are suspect in several ways. For one thing, they do not measure prices at which transactions actually occurred, but result from surveys. As such, the data pick up trends only with a lag.
Theoretically, land prices could already be headed up, but the consensus seems to be otherwise. Poor prospects for the economy is one reason. In late March, private sector forecasters continued to scale back their projections. The respected Japan Center for Economic Research said on March 25 that it now expects the Japanese economy to shrink a price-adjusted 0.9 percent in the fiscal year that begins April 1. In mid-December they had predicted a 0.6 percent decline. With economic activity continuing to decrease, demand for land is likely to drop off as well.
The weakness of the property market, and the prospect that it will remain depressed, is not good news for financial institutions who continue to see the value of their collateral dropping. Moreover, the trend suggests that real estate activities remain sluggish, implying that more loans will turn sour.
Tokyo, of course, is well aware of the relationship between land prices and the health of its financial institutions, in which it has an increasing direct stake. Moreover, property owners have political influence. It would not be surprising if these factors led Tokyo to adopt further measures to stabilize or even reverse land price trends. Such policies, or the prospect of the same, have resurfaced at regular intervals since prices started falling in the early 1990s. However, these "price support" activities can serve to freeze the market inasmuch as current owners (or potential owners such as financial institutions in a position to seize collateral ) figure they can gain by waiting. As a consequence, firms eager to snap up relatively cheap land for new ventures have to cool their heels. The latter group's inactivity, in turn, removes from the economic equation what would otherwise be a source of economic vitality.
"JEI's Spin on the News" are the opinions of one of more members of JEI's staff and do not necessarily represent the views of the organization.