Last updated July 21st, 2022.

 

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, famous hospitality, and relax a bit.

Tokyo is one of my favorite places to “escape from the third world”. The sheer chaos of frontier markets is exhilarating, and the investment opportunities moreso still. But even I sometimes need a break from developing Asia.

With that said, I would never buy property or invest too much money in Japan despite my love for the country. Three huge problems would make me avoid investing there – perhaps minus a few stocks that have their own individual merits.

Property taxes in Japan are high while rental yields remain perpetually low. Yet those are just the obvious reasons why owning real estate in Japan isn’t ideal for investment purposes.

The major factors contributing to why you shouldn’t invest in Japan are rooted in three facts of life in the country. Namely, the Japanese mentality toward real estate investment, the nation’s poor demographic trends, along with regional tensions in East Asia.

Investing in Japan Real Estate? It’s Not an Asset

Real estate is considered an investment in most places. Assuming that you take good care of a house or apartment building, it should last indefinitely and appreciate in value along the way.

That isn’t normally the case when purchasing property in Japan though.

Whereas some of the most desirable pieces of real estate are over a century old in the western world, it’s the opposite in Japan. Property is typically assumed to have a useful life of between only 20 and 30 years.

That’s the harsh reality of a nation prone to earthquakes, tsunamis, and destructive wars for as long as anyone alive now can remember.

It’s beaten into the psyche of a people where families historically owned a generational plot of land, and when older family members passed away, all structures on it were razed and rebuilt.

To be fair, it’s mostly true that real estate in Japan won’t last long. Your dream home will have a lifespan of several decades, in all probability.

Repairs can usually be made and the Japanese do enjoy 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 eventually get your assets, a “crazy neighbor” next door might. Owning property in Japan is riskier than it appears on the surface.

 

Demographic Crisis Haunts Japan Property Market

You may already know that Japan faces a demographic crisis. Sadly, their citizens’ average age is older than anywhere else on the planet.

Combine that with a falling population, along with the implications for Japan’s workforce productivity, and it’s easy to see why the nation’s economy will almost certainly have a rough few decades.

A greater amount of public spending will certainly need to be allocated toward healthcare, pensions, and other social services in Japan.

Property values will face downward pressure in the future, even in Japan’s bigger cities like Yokohama and Osaka. Central Tokyo will nonetheless see continued demand though.

 

Japan’s population will fall by over 20% in the next three decades alone. It’ll look even worse by the end of this century.

 

By 2050, Japan’s population will decline to under 100 million. On top of that, the percentage of retirees will rise dramatically at the same time. Tackling both these factors at once will prove 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 practically vanishing off the map. 8.2 million homes across Japan are now unoccupied. Meanwhile, Japan’s population decline will only make these problems worse until housing oversupply even plagues major cities like Tokyo and Osaka.

 

Geopolitical Concerns in East Asia

Japan (and really East Asia in general) have enjoyed relative peace and stability since the end of World War 2. Nations in the region were far 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 finally surpassed Japan’s to become the world’s second largest. Many decades of rapid growth currently allows China to directly compete with Japan both economically and militarily.

China’s buildup of armed forces and greater assertiveness is forcing its historic rival towards a once unthinkable decision. Specifically, Japan is taking the first steps of reactivating its military for the first time in generations.

Furthermore, a nuclear armed North Korea remains a wildcard in the Asia-Pacific region. Peace talks between North and South are making slow 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. You should consider all factors surrounding such a big decision like making a real estate purchase in Japan.

Investors should be aware that history often repeats itself. A continued rise in tensions may, at the very least, cause greater economic uncertainty. At worst, they could possibly wreak havoc on Japan’s financial markets.

Do you agree with this article or not so much? Either way, there are plenty of other countries in Asia with better fundamentals than Japan. Consider investing in one of them instead.

 

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About Reid Kirchenbauer

Reid Kirchenbauer is the Founder of InvestAsian. He's an international stock trader and property investor based in Southeast Asia. Reid manages the world's first frontier market real estate fund and has been featured in publications such as Forbes, Property Report, South China Morning Post, and Seeking Alpha. You can learn more about him here.

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