Japan Brief: Inflation and Rents – A Complex Relationship

Having remained largely stagnant since 2000, logging an annual growth
rate of close to 0%, the Japanese Consumer Price Index (CPI) entered a
phase of more rapid acceleration in 2022. While inflation has eased
somewhat since the start of 2023, the CPI is maintaining y-o-y growth of
around 3%. Having targeted a long-term inflation rate of 2%, the Bank of
Japan (BoJ) has determined that the current economic situation
suggests that this level can be stably maintained, using this as
justification to lift its negative interest rate regime at its monetary policy
meeting in March 2024. With signs of inflation finally taking root, real
estate investors in Japan are now turning their attention to whether
inflation may support or enhance rent increases. If the economy enters
the phase described by the BoJ as “a virtuous cycle” of a gradual rise of
wages and prices, rent growth may potentially exceed the level seen in
the past. However, the commercial real estate market is likely to be more
significantly affected by shifts in the supply-demand balance of each
sector, triggered by supply trends and/or structural changes. This
projection is underscored by the trends already observed in the
commercial property markets of other countries which have been dealing
with levels of inflation exceeding those seen in Japan for a significant
length of time.