Until consumers get more confident, it will be hard to create a cycle of positive inflation, where rising spending provides the fuel for wage increases and thus more spending. The popularity of Abenomics will also remain under threat: smaller apartments are not what the Japanese public expected from an economic stimulus.
Friday, February 6, 2015
Why are Tokyo Apartment prices rising?
Lower interest rates increase housing demand, which drives up the price of houses, clearly illustrated in the graph above.
Lower interest rates also depreciate the yen relative to foreign currencies due to lower demand for yen in the market for foreign exchange (because foreign investors are less likely to want yen to invest in Japanese bonds because of the lower rates). This makes Tokyo apartments look less expensive to foreign buyers, which also increases demand for housing.
From a macroeconomics point of view, this is supposed to start a virtuous cycle: higher prices lead to higher wages which causes consumers to spend more: because one consumer's spending is another worker's income, the cycle continues This is the so-called "Keynesian multiplier."
In Tokyo, at least, it is not working because consumers are buying smaller houses,