Japan Studies

Back to Contents of Issue: November 2000

END OF A MYTH? The Changing Perceptions of Land as an Asset in Japan.

by William Hall

Has the belief in ever-rising prices for land in Japan finally been broken? Will we ever again see a repeat of the situation at the peak of the bubble economy when the value of land in the Greater Tokyo region was reportedly equal to that of the total land mass of the United States?

During the past 100 years, there have been four major periods of acute land value inflation in Japan. The first of these was in 1918-1919 following the end of World War I. And, excluding the early Occupation period, there have been three peak periods of land inflation in the post-World War II period, from 1958-1963, in 1972-1973, and, most recently, from 1987-1990 in the so-called "bubble period."

Although there have been dips in land values following these inflationary peaks, with one exception, at no time in the past 100 years has the year-on-year percentage change in land values fallen below zero for three or more consecutive years. That one exception has been the period since 1993 following the collapse of the bubble economy.

Each year, the National Land Agency publishes a "White Paper on Land," and the information above on long-term trends is drawn from the 2000 edition. The 2000 White Paper also contains some interesting data on changing perceptions, among both Japanese citizens and Japanese corporations, of land as an asset.

In January 2000, the National Land Agency conducted a nationwide study among Japanese nationals aged 20 years and above entitled "A Survey of the People's Consciousness in Regard to Land Issues." An attack sample of 3,000 randomly selected respondents was used, and a completion rate of 73% was achieved. In the White Paper the results from this study are referred to as the 1999 results since the study was conducted during the 1999 fiscal year ending in March 2000. Similar studies have been completed in earlier years, thereby enabling us to make comparisons of attitudinal changes over time.

In the study, respondents were asked whether or not they considered land to be more advantageous as an asset than savings or stocks, and were given three choices of response -- Agree, Can't Say Either Way, Disagree. On a nationwide basis, the percentage of those considering land as more advantageous was 39%, versus 34% considering savings/stocks as more advantageous. These scores represent a dramatic decline in the perception of land as an advantageous asset compared to 1993 when land was favored on a 3:1 basis. (See Table 1.)

  Agree Can't Say
Either Way
Disagree Don't Know
1993 62 11 21 6
1995 49 20 27 4
1997 49 17 29 4
1999 39 21 34 6
1999* 36 20 41 3
* (3 Major Cities)

Note also that in the three major cities of Tokyo, Osaka, and Nagoya, in the 1999 survey, savings and stocks (41%) were perceived as more advantageous than land (36%) as an asset.

Those respondents who agreed that land was the more advantageous asset were asked their reason for thinking this way. The highest response (42%) was for "Land can't be lost or destroyed physically," up from 28% in 1995. This was followed by "It is advantageous to own land when one wants to borrow money" with 15%, down from 23% in 1995. Only 8% of respondents have a great expectation that they can profit from an increase in the value of land, the same percentage as in 1995. And a further 11% have an expectation that the risk of a further fall in land prices is extremely small, up from 8% in 1995. In short, even among those who consider land to be more advantageous as an asset, the reason for preferring land is moving away from land as a source of possible financial gain and more towards a perception of land as a physical resource.

When asked their preference for ownership versus renting of their primary dwelling, an overwhelming 83% of respondents prefer ownership, essentially unchanged from the 85% in 1995. However, when we review the reasons for this preference, we see a similar pattern emerging in regard to the decline in the perceived advantageousness of land as an asset, particularly over the last two years. The percentage giving "land/buildings are advantageous compared to other assets" fell from 54% in 1997 to 33% in 1999, while the security aspects of land ownership increased significantly in the past two years. (See Table 2.)

  1993 1995 1997 1999
  % % % %
Feel secure and can freely use if one owns the dwelling 71 76 78 86
Land/buildings are advantageous compared to other assets 54 53 54 33
With rented land/dwelling, one's rights and livelihood are insecure, which is unsatisfactory 25 28 23 35
Note: Multiple response question

Distinct from the above study among Japanese citizens, a study entitled "A Survey of Corporate Activities in Regard to Ownership and Use of Land" was also conducted in January 2000. This study was conducted among companies with paid-in capital of ´yen;10,000,000 or above and having headquarters in one of eight major cities in Japan (Sapporo, Sendai, Tokyo, Nagoya, Kyoto, Osaka, Hiroshima, and Fukuoka). An attack sample of 9,000 companies was used, and a 44% response rate was obtained. Similar studies have been conducted in earlier years, thereby once again enabling comparisons over time on this topic.

Companies were asked their opinion on whether, in the future, it will be more advantageous to own or to rent/lease land. In 1999, ownership and rental/lease each received equal preference of 44%, a significant change from 1993 when some two thirds of respondents considered ownership to be more advantageous (see Table 3.)

  Rental/Lease Ownership  
  Advantageous Advantageous Other
  % % %
1993 29 67 4
1995 36 50 14
1997 39 49 13
1999 44 44 12

Corporations are not only stating that land ownership is less attractive than it used to be, they are also acting on this perception. According to National Land Agency data, in the seven-year period from 1993 to 1999, the net area of land owned by corporations in Japan (sales of land minus purchases of land over the seven-year period) declined significantly.

In addition, since 1996 there has been a rapid increase in corporations selling their head office building, with most of these sales having some form of leaseback arrangement. In 1998, for example, 18 corporations sold their head office building, with 14 having a leaseback arrangement for the total building and a further two having a partial leaseback arrangement for divisions of the company.

Those companies that owned land that was not currently being used were asked what were their future plans for this unused land. 49% stated that they would keep the land as is for the time being, 35% stated that they will sell the land, and 12% stated that they are currently re-evaluating their usage plan for the land.

The National Land Agency also conducted another study entitled "Survey in Regard to Land and Corporate Management Change" among listed and OTC companies. This study, a mail survey among some 3,300 companies, was conducted in January-February 2000, and achieved a 29% response rate. One of the questions in this survey concerned the anticipated impact on corporate management of the introduction of the new accounting standards beginning March 2000 (which will bring Japanese accounting standards closer to international standards).

In regard to land specifically, companies were asked what changes would occur in corporate thinking in regard to land due to the introduction of the new accounting standards. 48% of companies responded that they would pursue effective utilization or change the current use of their land (without selling). A further 28% responded that they would move to sell land and reduce their land holdings.

So what does it all mean? Among both ordinary Japanese citizens and Japanese corporations the expectation of being able to profit from an increase in the price of land has drastically diminished. With the possible exception of land in prime locations in or adjacent to major cities, for the next five to ten years we are unlikely to see a repeat of what was formerly an inexorable rise in the price of land in Japan.

For Japanese corporations, the introduction of more transparent accounting principles, the need to make provision for under-funded pension reserves, and the need to reduce debt among (virtually) bankrupt construction, real estate, and retail companies means that a continuing sell-off of corporate land holdings is likely (assuming buyers can be found). This extra supply of land is likely to keep a lid on prices.

In addition, the Japanese government is a significant holder of land, historically and, more recently, in lieu of payment of corporate and inheritance taxes. In view of the massive public sector debt, it would not be at all surprising to see the government begin to unload some of its land holdings at prices below what they have been prepared to do in the past.

As always, we also cannot overlook the demographic factor. With a rapidly aging population and a declining marriage and birth rate, and assuming a continued government reluctance to entertain the prospect of an influx of immigrant labor, demand for new housing starts can also be expected to decline.

Those average Japanese citizens who purchased a dwelling in the past 15 years have suffered significant wealth deflation. They are trapped with high repayments for a deflated asset, and, if they sold the dwelling, the amount received is unlikely to provide sufficient funds to pay off their housing loan. This debt overhang will continue to act as a brake on increased consumer spending. Many Japanese corporations face a similar debt overhang situation, one that will likely be exacerbated with the introduction of the new, more transparent accounting principles.

But the decline in land values is not all bad news. For the average consumer, it will become increasingly possible to buy a small dwelling much closer to the center of a major city, thereby reducing the long commute. And land prices further out from major cities will continue to fall.

For small businesses also, the decline in land values may have a beneficial side. Faced with the prospect of further declines in land values and with larger corporate borrowers going directly to the market for their capital needs, banks may be more willing to lend to smaller companies on the basis of a business plan without a land-backed mortgage.

As a footnote, the White Paper has one page devoted to mention of the concentration of new venture businesses in Bit Valley. The fact that this relatively new development has already made it into a government White Paper on land should give those Netpreneurs rushing into Bit Valley some food for thought. Rents in the Shibuya area are already not cheap, and this imprimatur-like benediction on Bit Valley may lead to increases in rent in the area. Are startup managers considering the possibility of using other cheaper but still well-located sites instead of rushing pell-mell into Bit Valley? Or has an office in Bit Valley become a fashion statement for wannabe entrepreneurs?

William Hall (williamh@isisresearch.com) is president of the ISIS/RBC/CORAL Group, which provides market research and consulting services in Tokyo.

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