Third of six parts

Preparation for the 2020 Tokyo Olympic Games is fueling both expectations that Japan’s economy will grow and fears of an asset-inflated bubble.

But because the economy still faces uncertainty, all that glitters may not be gold.

The recent influx of foreign tourists, largely helped by the weakening yen, will likely continue to support the economy in the coming years by propping up retail sales and encouraging investment to capitalize on the tourism boom, while the Bank of Japan’s monetary stimulus will keep borrowing costs at rock bottom.

However, property sales in Tokyo, a barometer of the underlying tone of the economy, are showing signs of slowing as major developers are delaying projects due to a labor shortage, which raises personnel costs, and shrinking demand as a result of weak wage growth.

Foreign tourists have been flocking to Japan in recent years, topping 20 million for the first 10 months of 2016 compared with 19.74 million the previous year, which was itself a record, according to the Japan Tourism Agency.

The figures followed government efforts, including easing visa rules and expanding tax exemption for shopping by foreign visitors. But the tourism boom also reflects the benefits of the yen’s fall.

The currency depreciated from ¥103 against the dollar to ¥118 following Donald Trump’s victory in the U.S. presidential election and an interest rate hike by the Federal Reserve, gave new hope in the battle against chronic deflation. The weaker yen makes Japanese exports more competitive and raises the price of imported goods.

“The yen’s weakness contributed the most (to the tourism boom),” said Naoki Hatsugai, a senior official in the tourism agency. “Accepting foreigners generates economic effects and also benefits international cultural exchanges.”

Under Prime Minister Shinzo Abe, Japan is aiming to further increase the annual number of incoming foreign tourists to 40 million by 2020 and 60 million by 2030.

Faced with the deluge in tourists and future visitors, the government has begun to loosen restrictions on minpaku accommodations in private houses and apartments.

The deregulation enables minpaku hosts to operate in designated residential areas where hotels and inns are not allowed. This could help attract more tourists to areas that have benefited less from the tourism boom than large cities.

Unlike hotels, minpaku do not require massive initial investments because the homes — including abandoned ones — already exist. That will provide greater opportunities for companies seeking to capitalize on the boom.

Given the lack of hotel rooms in big cities like Tokyo and Osaka, the minpaku industry is expected to grow rapidly and help respond to a surge in demand in the years leading up to the Olympics, the agency said.

There are around 46,000 minpaku hosts in Japan, according to Airbnb Inc., the San Francisco-based online lodging service. But some are not properly registered as lodging operators, a situation that prompted the government to draw up a new law to clarify the terms for entrance to the minpaku industry and prevent potential trouble between guests and residents in the neighborhood where such premises operate.

The government’s efforts to boost the tourism industry and the economy also include legalizing casinos, despite opposition due to fears of social problems such as gambling addiction and the involvement of organized crime.

Since Tokyo was picked in 2013 to host the Olympics, major property firms have been accelerating development projects in the capital, causing a surge in real estate values and even prompting concerns about an economic bubble, similar to the one experienced by Japan in the late 1980s and early ’90s when land prices nationwide were boosted by speculative investments.

Bank lending is expanding strongly, with new real estate loans standing at ¥5.9 trillion in the six months through September, up 17 percent from the same period of 2015, BOJ data show, as property developers rush to borrow at lower interest rates following the central bank’s quantitative easing and negative rate policy.

The lending attitude of financial institutions has become very accommodative, at levels seen in the aftermath of the collapse of the bubble, according to other BOJ data.

The rush of construction in Tokyo, meanwhile, has tightened the labor market. Also facing the need for reconstruction are areas in the Tohoku region devastated by the 2011 tsunami, but builders are struggling to secure skilled workers, forcing some projects to be delayed. To make things worse, the labor shortage is causing upward pressure on wages, while the weaker yen has lifted the cost of importing raw materials.

The manpower problem is not just limited to the construction industry. Japan’s job availability has improved to levels unseen over the past 25 years, another sign of an overheating economy, as the nation’s aging and declining population has also put strains on sectors that include welfare, agriculture and trucking.

But now some of the boom is easing. Land price hikes in the capital are showing signs of pausing, condominium sales are declining and office vacancy rates in central Tokyo are off their feverish pace. Analysts say the property market is now going through an adjustment and will likely resume expansion, but at a more moderate pace.

“The construction industry is suffering a chronic shortage of engineers and laborers,” said Tadashi Matsuda, a senior analyst at the Real Estate Economic Institute. Hosting the Olympics will boost the economy’s potential, but the labor crunch “will be a cause of disturbance.”

Matsuda meanwhile denied the economy is experiencing the same type of bubble that emerged in the 1980s.

“At that time, people believed land prices would never fall. But nobody thinks that way today,” he said.

Hiromichi Shirakawa, chief economist at Credit Suisse in Japan, said the current expansion in the real estate market is affected by speculative money from abroad, and is not a result of average Japanese consumers spending their money in the belief that the economy is getting back on its feet.

“Expectations of economic growth are equivalent to expectations of higher wages. We’ll almost never see wage hike expectations grow throughout Japan,” Shirakawa said.

Japan’s economy has failed to end deflation despite three years of effort by BOJ Gov. Haruhiko Kuroda to spur prices. Even if the Olympics fuel expectations of future growth, weak wage increases will continue to weigh on consumer spending and sink the BOJ’s efforts.

Even banks, which would need to find more borrowers to cover lower profit margins on lending due to the BOJ’s rate cuts, have recently grown cautious about fresh loans for the real estate because the property market may take a while to settle after the current adjustment, industry sources say.

“They (banks) hate uncertainty. Remembering the damage caused by the subprime loan crisis and the collapse of Lehman, they want to keep away from risks,” an official of a major real estate firm said. “We are welcoming the Olympics. But we’re not dancing anymore.”

This New Year’s series examines how Japan is preparing for the Olympics and Paralympics.