Challenge of asset deflation

The national land, infrastructure and transport ministry reported on Sept. 19 that land prices in residential areas fell by an average 2.5 percent in the year to July 1, marking the 21st consecutive annual decline.

In commercial areas, land prices have fallen by an average 3.1 percent — a drop for the fifth straight year. Noteworthy is the fact that declines in land prices slowed down in residential areas of 39 prefectures and in commercial areas of 42 prefectures, compared with 22 prefectures and 31 prefectures, respectively, in 2011.

Movements in land prices generally reflect demographic changes and the economic conditions faced by local communities. Because local economies have weakened and the countryside is suffering from depopulation, land price appreciation across the board is unlikely. It must also be remembered that the attitudes of people and businesses towards future disasters is influencing land price movements, both upward or downward.

Declines in property prices slowed recently even in areas hit by the 3/11 disasters. The land prices in areas of higher elevation in the affected areas rose apparently because buildings and housing there are safer from the effects of future tsunamis. The Matsumine residential area in Rikuzen Takada, Iwate Prefecture — a highland area about 2 km from the city’s center, which was devastated by the 3/11 tsunami — saw property prices shoot up 14.6 percent, the highest in the nation. Land prices also increased in a number of spots in Sendai due to reconstruction-related projects and demand for land to build new housing.

Land prices fell in coastal areas in Kanagawa, Shizuoka, Mie, Wakayama and Kochi prefectures apparently because businesses and people fear a future massive earthquake and tsunami, which is expected to originate in the Nankai trough — a 900-km subduction zone in the Pacific Ocean.

Some residential areas in urban centers also are experiencing increased land prices because living conditions are better and there is easier access to public transport. There are also moves among many businesses to seek buildings that can withstand strong earthquakes, thus enabling the businesses to continue operations, even in the case of a large quake.

Declines in land prices appear to be bottoming out. But that may be temporary, particularly if the economy remains in the doldrums. There is also the possibility that demand for residential property will increase sharply prior to the higher consumption tax rate increase scheduled to take effect in April 2014. Land prices may then nosedive after the tax hike is in place.

If a large number of enterprises suffer from appraisal losses due to falling land prices, this will delay Japan’s economic recovery. The central government needs to consider what measures it will take to pull the economy out of asset deflation. Local governments on their part need to design attractive residential areas and urban centers to attract people and enterprises.