Last Friday the Bank of Japan (BoJ) announced the implementation of a negative interest rate policy, whereby it would charge a 0.1% interest rate on commercial banks' deposits with the BoJ. The new rate is applicable to cash deposited after February 16, 2016.
Hiroshi Okubo, Head of Research for CBRE Japan states the move is intended to boost the domestic economy and strengthen corporate sentiment amid increasing uncertainty in the global financial market. Share prices in Japan had fallen by 10% this year as of January 28, while the Yen had strengthened by 1.2 % to stand at JPY 118.82 to the USD the same day.
Following the BoJ's announcement, the Nikkei rose 2.8% on January 29 and the Yen fell to below JPY 121.14 to the USD for the first time since the beginning of the year. On the same day, 10 year government bond yields depreciated by more than 100 basis points to a sub-0.1% rate for the first time in history.
Hiroshi also stated:
Lower interest rates will benefit J-REIT shares as it will make their dividend yields more attractive. This will further improve the financing environment for J-REITs and also invigorate the overall real estate investment market.
The lower cost of finance means further cap rate compression in the overall real estate market is likely to continue, including for prime assets in central Tokyo.
The wider interest rate gap between Japan and the U.S. will mean a weaker Yen against the USD. This will support the continued growth of inbound tourism which had been at risk of a slowdown due to recent weakness in the RMB. This should support demand for high street retail assets and hotels in major cities.
Cheaper financing and the weaker Yen are expected to boost corporate sentiment and ensure office demand remains solid. Major office markets will therefore continue to see tight supply and demand. CBRE Research reiterates its view that Grade A office rents in Tokyo will rise by approximately 10% over the next couple of years.
Outbound Japanese real estate investment rises 23% year-over-year to $1.3 billion, development investment activity was also brisk, and indirect property investment via funds is set to increase in the coming year.