Real estate sector
SECTOR REVIEW
Dance, dance, dance
■  Japan’s dance card for 2009: The European and US economic bubble which
has been building up over the past 10 years has finally ended. They are now
entering a period in which the excess of credit will have to be reduced to an
appropriate level. This implies a similar scenario to that which occurred in Japan
in 1997 through 2003. In other words, we expect a deflationary economy in
Europe and the US. However, in Japan, we expect an expansion of credit
creation from now on. In 2009, we expect Japan will take over from the US and
Europe as leader of the economic dance.
■  Government economic policy to promote the effects of a recovery in
domestic demand: The recent introduction of the biggest-ever tax break on
housing loans and the Credit Guarantee Association’s introduction of a 100%
guarantee on ¥20tn in loans to small- and medium-sized enterprises (SMEs)
should result in an expansion of credit creation and stimulate a recovery in the
Japanese economy. These measures are equivalent to or stronger than the
measures introduced at the time of the credit crunch between 1997 and 1999,
and we believe they will have a significant effect in promoting a domestic
demand-led economic recovery.
■  Similarity to the late 1980s: Following the Plaza Accord in 1985, Japan fell into
a recession driven by the sudden appreciation in the yen. This led to calls for an
expansion in domestic demand, with the Bank of Japan (BoJ) lowering the
discount rate to what was then a historically low 2.5% and increasing public
spending to drive an economic recovery. In the current situation, with a strong
yen and low levels of economic activity in the US and Europe, the only choice left
for the Japanese government is to attempt to expand the domestic economy. We
believe the government will leave no stone unturned in an attempt to achieve this
aim. In real terms, the government has injected around ¥250bn of financing into
the real estate companies through the Japan Housing Finance Agency, an
independent administrative agency, while also introducing a financing system for
real estate investment trusts (REITs) through the Development Bank of Japan.
The government has also decided to waive capital gains taxes on land
purchased in 2009-10, and has put in place a number of support measures.
Moreover, on the economic policy front the BoJ has cut its policy rate to 0.1%,
and has decided to increase purchases of government bonds.
■  Maintain OVERWEIGHT sector stance: It will be difficult to avoid a slowdown in
the US and European economies. The cutback in previous levels of excess
credit could have an unquantifiably large impact in terms of economic
deterioration. Japan has already been through this experience. However, in
Japan, there is a strong possibility government policy will lead to expansion of
credit creation, and drive an increase in domestic demand. Accordingly, we take
a positive view on the real estate sector, which is well-placed to benefit from
these policies. We believe Japan will finally start to lead the economic dance this
year.

Theme for 2009 is “Dance, dance,
dance”
The CEO of a major US bank has been reported as saying “As long as the music is
playing, you’ve got to dance”. This signifies that even while the banks knew the US was in
an economic bubble, they were unable to do anything to put a stop to it. This clearly
illustrates the dilemma affecting not only the bank in question, but a large number of US
and European financial institutions.
However, while the US and European countries went on dancing, with a few exceptions
Japan failed to dance even while the music was still playing. Put differently, it might be
truer to say that Japan was unable to participate in the dance. The main reason was that it
danced too much in the past (particularly in the late eighties), and the subsequent bitter
experience was still fresh in the memory of Japanese institutions. In addition, whenever
Japan tried to dance, it was shackled (for example by the restrictions on lending to the real
estate industry and funds instituted from 2006).
Now the music has started to play again. This music is especially suited to Japan, and
does not sound familiar to US or European ears. Moreover, in the other US and European
countries, there is no longer either the energy or the will to dance. We believe now is the
time for Japan to take to the dance floor. The words “Dance, dance, dance” indicate an
increase in purchases of European and US companies and real estate by Japanese
enterprises which are benefiting from the expansion in domestic demand in Japan and the
strength of the yen. We expect developments to be the exact opposite to the trend which
has been in place over the past ten years.
Let us take a look at the main reasons why we expect a slump in the US and Europe and
an expansion in the economy in Japan. The main reason is that since the US and Europe
will enter a period when they will have to rein back the recent overexpansion in the supply
of credit to appropriate levels, we expect Japan to enter a period when credit creation is
expanding.
We expect the US and Europe to undergo the same kind of deflationary economic
conditions as were experienced in Japan between 1997 and 2003. In Japan’s case, bank
lending shrank by around ¥100tn over this period. This represents the loss of an amount
equivalent to around 20% of nominal GDP. It is impossible to gauge the scale of credit
contraction in the US and Europe and the period over which the money supply will contract
in these areas. However, since we expect the credit crunch to continue until the
appropriate level is reached, we believe it will be inevitable for bank lending balances to
come down in the US and Europe.