- The CPI has only seen a moderate increment because wage growth remains stagnant.
- The Bank of Japan (BOJ) has decided to maintain its loose monetary policies as inflation in the country has been moderate, and thus has little reason to increase interest rates.
- Other major economies have seen interest rate hikes in contrast, which has led to the weakening of the yen, and the rising costs stemming from this has become a political issue for Japan.
- Subsequent actions of other central banks will likely have a large impact on the Japanese economy through exchange rate movements.
- The government is considering recommencing nuclear power plants and has plans to welcome inbound tourists, especially high-end tourists. These measures should lead to a more stable trade balance and strengthen the yen.
- The BOJ will likely revise its monetary policy by next spring at the latest when a new governor is appointed.
- We predict a mild interest rate increment of 20-30 basis points (bps), and up to 50bps from the current 25bps. The adjustment should be milder for the 5-year swap rate.
- An increase in interest rates will likely disproportionately affect sectors that have seen sharp pricing and compressed cap rates, like logistics and residential.
- On the other hand, retail and hotel assets might become more appealing as they are expected to continue recovering.
Investment in a rising interest rate environment
In the face of inflation and a weakening yen, the BOJ is likely to revise its monetary policies and a moderate increment in interest rates is expected. Mild price corrections could be observed in sectors that have seen sharp pricing and compressed cap rates, while other sectors that were less popular during the pandemic could become more appealing as recovery is expected to continue.
Savills Research & Consultancy