What next for real estate investors after Japan’s historic rate hike?

The impact of the Bank of Japan's (BoJ) historic rate hike, the first in 17 years, on the country’s markets and investor sentiment is, on the face of it, minimal. Markets were long anticipating the move, which only nudged the key interest rate up to between 0% and 0.1%, from -0.1%.

But as Japan’s monetary policy now faces in a new direction, the potential impact of interest rate rises could be on exchange rates.

“The yen has been close to its lowest level in several decades against the dollar, making the carry trade – of borrowing in yen at near-zero interest rates, and investing abroad at higher rates – very lucrative for Japanese investors,” says David Rea, Global Director of Macro Research and Chief Economist EMEA, JLL.

“A weakening yen has made these overseas assets more valuable in yen terms.”

For outbound real estate investors, there may therefore be an impact on capital flows, but these have historically been much smaller than flows from, for example, South Korea, a markedly smaller market.

A bit of context also makes Japan’s small numerical shift look bigger.

“The change is much more significant than it appears,” Rea adds.

The reason: It’s equivalent to more than three 25 basis point (bps) hikes from each of the world’s other major central banks.

Japan’s policy rate has not been above 0.5% since 1995, meaning the maximum variation in the policy rate, from its lowest to highest points over the past 30 years, is 0.6 percentage points, or 60 bps, says Rea. This compares to, over the past two-and-a-half years, 525 bps for the Federal Reserve; 515 bps for the Bank of England; and 450 bps for the European Central Bank.

Japan’s move stands in contrast with other central banks, including the Federal Reserve and the Bank of England, which both held rates steady following a period of aggressive rate hikes to curb soaring inflation.

Switzerland is the only major economy moving in the opposite direction, recently cutting its main policy rate by 0.25 percentage points to 1.5%.

The divergence in policies can be mainly attributed to the vastly different economic situation in Japan compared to the rest of the world, according to Koji Naito, Research Director, Capital Markets, Japan, JLL.

“Japan's inflation rate hovers around 2%, which is relatively modest when compared to the top markets,” Naito says. “Wage growth has also stalled or even declined, which means significant rate hikes could be detrimental to the economy.”

Beyond the slight increase in cost of debt, Naito expects business as usual for Japan's domestic real estate, where business remains brisk across sectors, mainly led by J-REITs and private REITs reshuffling their portfolios through acquisitions and disposals.

Despite the rate hike, Japan’s strong fundamentals – resilience, stability, low political risk – still hold significant appeal for investors.

“The only downside, although relatively insignificant, is the marginal increase in lending costs,” says Naito. “We still expect investment to increase later this year and remain relatively stable into 2025.”

For outbound investors, the focus will likely shift to domestic assets, Naito says, though overseas expansion is still on the cards for some.

The future path of capital flows hinges on the BoJ’s next move. While the central bank has remained tight-lipped on its plans, Naito anticipates a cautious approach.

"The BoJ will likely prioritize substantial wage increases and economic stability before implementing further hikes," Naito concludes.