Surge in Tokyo Land Prices
(8/2/2005)
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.
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.