The state of the the cycle of real estate and stock in the Japanese market

The state of the the "cycle" of real estate and stock in the Japanese market

There is a major four-step "cycles" in the stock market. These cycles are: Financial Market -> Performance Market -> Reverse financial market -> Reverse performance market. In the financial market, financial easing by central banks or fiscal stimulus by the government take place during a recession. Money inflated by financial easing flows into the stock market, and stock prices are reversed, a so called "recession stock rise" situation.

As a result of monetary easing for fiscal stimulus, corporate earnings start a full fledged recovery and it becomes a "performance market", leading the central bank to turn to monetary tightening, and the "reverse financial market". After the economy has peaked out, it will enter a recession with stock prices lower, becoming a "reverse performance market". Following this, it will flow towards becoming a financial market again. In the case of Japan, the prolonged state of zero interest and other irregular monetary policies make it a somewhat irregular case, but it seems to currently be a "performance market".

On the other hand, the real estate market also has a similar four step cycle in the form of "Recovery -> Expansion -> Recession -> Stagnation". In the "recovery" phase, the drop up until that point will give a sense of lower prices, and transaction values will gradually increase. Vacancy rates, and office rents, etc. will also bottom out and soon the "expansion" phase will begin. In the expansion phase, there are more new constructions, and prices continue to rise. Improvements in vacancy rates and office rent also continue, but as the favourable market continues, oversupply becomes and issue and rent prices start to fall, leading to the "depression" period. The volume of trading decrease, and vacancy rates rise, leading to the "stagnation" period. In the case of Japan, looking at the falling vacancy rates and rising office rent prices, it could be said to be in an "expansion" phase at present.

When the expansion period turns to a depression period, "oversupply" will become a key word, but the supply of units that had shown signs of recovery until 2014 dropped again in 2015. On the other hand, prices are continue to rice, so it could be said that the real estate market is expanding "well". Then again, many raise concerns about oversupply in the future, such as the "2018 problem" in the office building market. However, just as we pointed out in our August 31st article "The problem Japan faces for 2018...", thinking in the longer term of 5 years from now, the supply of office buildings will probably not be overwhelming. Considering this, it seems useless to worry too much about oversupply as things stand. While it will be important to keep an eye on supply and vacancy rates from now on, it is likely that this smart expansion phase will continue.