“The Outlook is Very Encouraging”: HJ Chat Room with Jesper Koll

The topic of inflation is very relevant in today’s economic environment. 

How has the Japanese economy performed during COVID? 

Given the record amount of Bank of Japan’s stimulus into the economy, is Japan also heading to similar inflation levels to the rest of the developed world?

To help answer some of these fundamental questions, or at least to provide an opinion, we would like to direct our clients to a truly fascinating interview with Jesper Koll in the HJ Chatroom.

In this interview, Jesper and Bryan Kipping discuss the Japanese economy, how can investors protect their purchasing power, the emergence of a new middle class, and the case for investing in Residential Real Estate.

The following is a transcript of the interview. To watch the video of the interview, please click here.

Housing Japan [hereafter, HJ]: Hello and welcome to the HJ chatroom! My name is Bryan Kipping, I’m the head of investment sales.

Back in 2017, we were privileged to welcome Jesper Koll as a guest speaker for a real estate seminar that was held at the Tokyo American Club. Today, I’m delighted to welcome Jesper as a special guest for a special feature on the HJ Chatroom about the Japan economy.

Jesper, how are you? Welcome! It’s lovely to see you.

Jesper Koll [hereafter, JK]: Thank you for having me. Looking forward to our discussion.

HJ: For those viewers who are not familiar with Jesper Koll, would you mind providing a brief introduction?

JK: Yes, it’s very straightforward. I’m originally from Germany, educated in the United States and I have been stuck in Japan since 1985. I came as a Ph.D. student and very quickly ended up in finance, working as the chief economist for various bulge bracket investment banks. I was the head of research for JP Morgan, and over the last four, five years, I’ve run my own independent investment company here in Japan.

HJ: Thank you. If you don’t mind, we’ll dive straight into the questions, and I guess we’re going to start with the obvious one — during this period of Covid, in your opinion, how has the Japan economy performed?

JK: I think that Japan’s economy over the last couple of years has done extremely well during this Covid crisis. And look, you gotta start at the big picture. Don’t forget that this country, Japan, despite Covid, continues to be the world’s largest creditor country; continues to run very, very large current account surpluses — and yes, of course, the overall economy took the usual hits, which happened around the world — but in terms of the speed of the recovery, it’s actually very strong.

Let me give you one concrete example. When you look at corporate profits, they actually have already recovered beyond the level that they were before the Covid pandemic struck. You find that, unlike, for example, in the United States, here, the threat of consumer price inflation, which is undermining the purchasing power of the people — the purchasing power of Mr. and Mrs. Watanabe — here in Japan, in terms of the consumer price level, basically things are remarkably stable. The bottom line in this is that the purchasing power of the people here in Japan continues to be very, very strong despite the pandemic crisis.

HJ: Interesting! I guess that’s the lead to my next question. Given the record amount of Bank of Japan stimulus, do you see Japan heading into an inflationary environment? And if the answer to this is yes, what are the best ways for an investor to protect their purchasing power?

JK: I think we need to differentiate between consumer prices and the level of asset prices. The short answer is, on the asset price side, I actually do think that Japan has entered already a period of long structural upside in inflation. You’re seeing this in real estate prices — not just here in Tokyo, but also in some of the regions of Japan — for the first time in one generation, actually beginning to increase.

Against that, when you look at consumer prices — and you’ve got to remember one thing — this is a government in Japan, irrespective of who is the prime minister, that will actually look out for your interests. So, for example, healthcare costs continue to be cut rather than being allowed to increase, which is unfortunately what we see in the US. So from that perspective, Mr. and Mrs. Watanabe, the Japanese consumer, is actually in an excellent position because the purchasing power of savings continues to be stable while asset prices are actually gradually increasing. I think that from that perspective, Japan is actually in a fantastic position and offers a great deal of investment opportunities.

This rise of a new middle class is exactly why Japan’s residential property market is one of the greater investments in real estate investments actually around the world.

HJ: Thank you very much for that. Going back to the 2017 seminar, if we consider the two questions that you helped to answer then, it was in regards to demand and interest rates. Let me start with interest rates. At the time, you forecasted that the Bank of Japan would not be raising interest rates for two years. Actually, they haven’t raised interest rates for four years, and, obviously, given the situation we have with Covid, at the moment they’re unlikely to raise rates in the short term. Would you agree?

JK: There’s no question about the short term, but I think that even over the next three to four years, the risk of the Bank of Japan actually increasing the cost of debt, increasing the cost to borrow, is very, very slim. The reason for that is two-fold. It is that inflation in Japan is actually controlled through other measures, rather than just monetary policy. I mentioned healthcare costs. Look at telecommunication costs, where for example, the government again is intervening. It’s not price controls, but [the government] is basically making sure that the level of competition continues to work in favor of the Japanese people’s purchasing power rather than just the profitability of corporations. So for interest rates, the answer is very easy — no interest rate hike is coming in the foreseeable future over the next three to four years. 

On the demand side, what is remarkable is that, first and foremost, Japan is actually a huge beneficiary of the new rivalry between the United States and the People’s Republic of China. You have the American government ordering or encouraging American companies to restructure their supply chain away from Chinese suppliers. Now, what does that mean? Who makes the machines that make machines? Who equips the factories with the latest robotics equipment? That’s Japan. So, on the demand side, ironically, Japan is actually benefiting from — dare I say — the new Cold War that is out there.

On the domestic side, the business formation and business investment here in Japan is actually accelerating very, very nicely. So you’ve got the leading companies of Japan actually rediscovering the Japanese archipelago as a base for production, as a base for logistics, as a base for a research center. So I think that on the demand side also, the outlook for Japan is actually very encouraging.

HJ: Again, going back to the seminar, there were comments from your good self in regards to students graduating university with full-time employment, and, equally, at the time, we had an increase of wages across the population that was driving higher purchasing power. The fact of the matter is that in Japan, we are experiencing, and will continue to experience, a decrease in population. Would you not expect the wage growth to be accelerating at a faster pace to drive even higher growth for purchasing power?

JK: And that’s exactly the key issue, and this ultimately does go back to the overall investment opportunity here in Japan. I believe that Japan is going to be one of the very few advanced industrialized economies where we are going to see the rise of a new middle class.

This new middle class which really stems from demand and supply. You’ve got a shrinkage of people graduating from university, and as a result of that, you find that leading companies — companies like Hitachi, Toyota, Mizuho — are now offering better contracts to the new employees. It’s very interesting. You can see that for the first time in one generation, full-time employment is actually growing. And what’s exciting is that even over the last year and a half, during the pandemic — yes, you did see an increase in unemployment, but you see that full-time employment actually continued to grow. So this demographic sweet spot that Japan is in, precisely because — yes, if you’re a 23, 24, 25-year old Japanese, you’re not competing against the billion Chinese, against the billion Indians. As a result of that, the quality of contracts is starting to improve. You get full-time employment contracts, which means that you’ve got access to credit.

And that’s, of course, where the real estate market benefits, because to become a first-time real estate investor, what do I need? I need some job security, and I need access to credit. And both of these are happening right now, and as a result of that, I think that this rise of a new middle class is exactly why Japan’s residential property market is one of the greater investments in real estate investments actually around the world.

HJ: I didn’t need to plug in for that, so thank you very much!

My last question is again going back to the seminar. At that time, [Tokyo] Governor Koike had just been appointed, and I guess there was great hope at that time for reforms, special economic zones being created to drive additional growth. Unfortunately, I guess on the surface of things, we haven’t seen the pace of reform take place. To some degree, do you still see that we are going to have reforms? Will special economic zones take place? What are your thoughts on that?

JK: In Japan, you have this pendulum swinging of yes, there needs to be more deregulation, to no, we need to have higher regulations. It sort of goes back and forth. Four, five years ago, there was a definite focus on deregulation on special economic zones. There’s no question that over the last couple of years, this pendulum has swung back. Particularly now that there’s this focus on national security concerns, that actually empowers the bureaucrats to even be more scrupulous in terms of implementing rules and regulations.

But the key question as an investor that you’ve gotta ask yourself is, is the private sector — the business community in Japan, whether they’re large companies or whether they’re small companies, are they actually competitive? Are they re-organizing? And here’s what’s exciting — to some extent, Covid has been a big catalyst for a huge increase in corporate metabolism. You see a record number of M&A activity in the domestic market. You see even a record amount of foreign investors coming into Japan buying Japanese companies — most recently PayPal committing more than two billion dollars into a made-in-Japan startup company. It’s incredible to see that the metabolism in Japan amongst the corporate world has actually picked up. That means that you will have better opportunities in the employment market because everybody needs to compete. That means that you’ll have rising purchasing power of the younger generation. That means that the quality, the quest for a higher quality of life, of higher quality of ‘where do I live,’ — all of that is actually now on an excellent trajectory to provide rising capital returns over the foreseeable future.

HJ: Thank you for that. You’ve helped answer part of my last question, but what do you think about the outlook for Japan for the next five years? To add to that question — obviously, we’ve gone through the Olympics now, but what is your impression of whether there’s likely to be an overhang of the economy as a result of the Olympics? And lastly, we have [former Prime Minister] Suga san, who has decided not to go forward for re-election, what impact that might or not have on the economy?

JK: First of all, I think in terms of the Olympics overhang, there’s really very, very little. If you have to point to some imbalances in the overall system here, there’s a bit of a worry in commercial office space. In commercial office space, there appears to be a new glut of supply developing, while demand is obviously under a huge cloud because nobody quite knows what the life-work and the telecommute versus office balance is going to be. So for my money, I think I would not really be too excited about office investment opportunities.

But again, in terms of the quality of life, the growth of a new middle class providing a strong structural tailwind, and this is a key issue — you and I can have a long debate about what happens next quarter or what happens over the next year, which is always good and fun and relevant as a stock market investor — but for real estate investment, it really is the structural trend that matters. It’s the structural trend where you’re going to get the highest rates of return, and that’s where this growth of a new middle class, where the demographic sweet spot in Japan in terms of yes, supply of labor versus demand of labor, that’s actually going to be a structural positive for the purchasing power of Japanese employees. And that’s where the driver for a positive structural upcycle in residential property actually comes from.

HJ: Thank you! There’s a lot of detail to take on board in terms of your observations here, but I want to take the opportunity to thank you for your time. It has been an absolute pleasure to welcome you back and to hear your current update. Thank you very much!

JK: Thank you very much. I hope we can have a live dinner presentation with your group of friends and investors. It would be a pleasure to meet face-to-face and have some fun and real discussion. Thank you very much for having me!