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July 4, 2016

On 24 June 2016, following the victory of the “leave” campaign in the referendum on European Union (EU) membership of the United Kingdom (UK), the Nikkei Stock Average fell nearly 8 percent, closing down JPY 1,286 from the previous day. It was also a day of turmoil in the foreign exchange markets, with the Japanese yen surging against the US dollar to reach JPY 99 at one point. Following the weekend, on the morning of 27 June 2016, the Japanese Government and the Bank of Japan (BOJ) convened an emergency meeting, reconfirming the importance of international collaboration to calm markets and reaffirming their intention to take measures to ensure liquidity in financial markets. Following this meeting and as of the closing session on 27 June 2016, the Nikkei has bounced back, regaining JPY 357 of its Friday losses, and the Japanese yen has also fallen back against the US dollar to the JPY 102 level.

GDP growth returned to positive territory in 1Q16, growing 1.9 percent at an annualised rate in the quarter. There were also signs that consumer spending was recovering. On the other hand, corporate investment, which had improved in the previous quarter, declined, which attracted attention concerning future trends. Against a backdrop of close attention being paid to the impact of the introduction of negative interest rates, the government announced that next year’s scheduled increase in the consumption tax rate was being postponed. Political posturing ahead of the upcoming Upper House election had also served to throw a spotlight on the future economic outlook. Given this situation, it is perhaps no surprise that Japan should also have experienced market upheaval following the Brexit result.

However, given it is still unclear what impact Brexit will have on the UK itself and the EU as a whole, it would be a little hasty, and certainly almost impossible at the current point, to discuss the specific impact on Japan. Nonetheless, what can be said is that Brexit has further muddied the waters about the outlook for the global economy, the impact of which will be difficult for the Japanese economy as a whole to avoid. As a result, it is likely that there will be instability in the markets, at least in the short term. The appreciation of the Japanese yen, in particular, must be closely scrutinised in terms of its impact on corporate earnings and downward pressure on individual consumption. At the same time, however, it will also be worth following trends in the downturn in import and resource prices, and real cost reductions in overseas travel expenses.

Impact on the Japanese Real Estate Market

In comparison with the overall economic picture above, the direct impact of Brexit on the Japanese real estate market is likely to be more muted. However, uncertainty over the global economic outlook could dampen corporates’ capital investment intentions, leading to some concerns about the impact on the occupier demand and office rent in particular. Currently, the vacancy rate in the Tokyo office market is very low and there has been an underlying upward trend in rents. Although the possibility that this upward trend may weaken cannot be discounted, given that the real estate rental market is slow to react to economic trends in general and tends to fluctuate over a longer period, it is hard to imagine that the Brexit result will cause any immediate ups or downs in the market. In reality, it is likely that the degree of impact will gradually become more apparent as the economic situation continues to develop.

Looking at the real estate investment market, domestic investors are the current drivers and their appetite for investment looks unlikely to waver significantly. In terms of investment opportunities in the actual market, the reality is that these remain limited due to an ongoing scarcity of assets. Furthermore, investors who have been able to find investment opportunities are probably not going to change their high degree of orientation to the Japanese real estate market. On the other hand, UK and EU investors may be more circumspect given the short-term market instability and the impact of the pound sterling and euro depreciation, and choose to adopt a wait-and-see approach. However, in a global context, with economic uncertainty looming large over Europe in particular, it is likely that Japan’s relative advantage as an investment destination will further increase. It is now actually the case that amid global instability, risk-averse capital is seeking a relatively safe destination, resulting in the current moves to buy Japanese yen and a downturn in yields on Japanese government bonds. In recent years, global real estate investment has shifted to developed nations such as those of Western Europe and Japan, and it is likely that in global terms, perceptions of the Japanese real estate market as a safe haven will gain even stronger recognition. Above all, the scenario in which predominantly Asian investment capital that had previously been targeted at Europe returns to Japan is one that becomes increasingly plausible.

At the end

As already noted above, at the current point it is impossible to gauge the full extent of the impact of Brexit. What is indisputable, however, is that uncertainty in the global economy has temporarily spiked, leading to concerns about the negative impact this may have on corporate and consumer sentiment. In this situation, it will be necessary to remain calm when following developments, including the possibility of new economic stimulus measures by the Government and the BOJ.

Click here to read more about the impact of Brexit on commercial real estate markets

Takeshi Akagi
Head of Research, Japan, JLL.
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