I’ve held a fascination with Japan, its culture, and food since a very young age. Each year, I visit the country to enjoy its remarkable efficiency and hospitality.
Tokyo is one of my favorite places to “escape from the third world”. The chaos of frontier markets is exhilarating – the investment opportunities even moreso. But even I need a break sometimes.
With that said, I would never buy property or invest too much in Japan despite my love for the country. Three huge problems make me avoid investing there, minus a few stocks with their own individual merits.
The reasons boil down to the Japanese mentality toward real estate investment, poor demographics, along with regional tensions.
1. Property in Japan isn’t an Asset
Real estate is an investment in most places. Assuming you take good care of a property, it should last indefinitely and appreciate in value along the way.
That isn’t the case in Japan though.
Whereas some of the most desirable pieces of property are well over a century old in the western world, it’s the opposite in Japan. Real estate is assumed to have a useful life of between only 20 and 30 years.
It’s the harsh reality of a nation prone to earthquakes, tsunamis, and destructive wars for as long as anyone alive today can remember. Beaten into the psyche of a people where families historically owned generational land which had any structures on it razed and rebuilt when older family members passed away.
To be fair, it’s mostly true that property in Japan won’t last long.
Repairs can be made and the Japanese have some of the world’s best earthquake resistant buildings. However, repairing aged structures is costly. Even the best homes will have damage after a few 8.0 earthquakes. And if the tsunamis, quakes, and nuclear meltdowns don’t get your assets, the “crazy neighbor” next door might.
2. Demographic Disaster
You might already know Japan faces a demographic crisis. Their citizens’ average age is older than anywhere else on the planet.
Combine that with a falling population, along with implications for workforce productivity and higher public spending on healthcare/pensions. It’s easy to see why Japan will have a rough few decades.
By 2050, Japan’s population won’t just decline to under 100 million. The percentage of retirees will rise dramatically too. Tackling both these factors at once will prove very challenging.
Of course, all these things will negatively affect the Japan property market. Less people means downward pressure on real estate demand.
You can already see rural Japanese towns vanishing off the map. 8.2 million homes across Japan are now unoccupied. Population decline will only make these problems worse until even major cities like Tokyo and Osaka are plagued by oversupply.
3. Geopolitical Concerns
Japan (and really East Asia in general) saw relative peace and stability since the end of World War 2. Countries in the region were all more concerned with economic growth, rebuilding themselves, and/or consolidating control over their citizens.
The situation is more tense today. Back in 2011, the Chinese economy surpassed Japan’s to become the world’s second largest. Many decades of strong growth allow China to directly compete with Japan both economically and militarily.
China’s buildup of armed forces and greater assertiveness is forcing its historic rival toward a once unthinkable decision. Japan is now taking the first steps of reactivating its military for the first time in generations.
Meanwhile, a nuclear armed North Korea remains a wildcard in the region. Peace talks between North and South are making progress – but Kim Jong Un’s true motives are still unknown.
I’m not screaming doom or saying war is coming. However, ancient rivalries and geography are two things which don’t usually change.
Investors should be aware that history often repeats itself. A further rise in tensions could, at the very least, cause uncertainty. At worst, they could wreak havoc on Japan’s financial markets.
Do you agree with this article? Either way, there are plenty of markets with better fundamentals than Japan out there. Consider investing in some of them instead.
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