More Houses in Japan May Actually Drag Down Inflation

Kuroda called the investment increase a sign policy is working.

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Residential buildings stand in this aerial photograph taken in Urayasu, Chiba Prefecture, Japan, on Wednesday, June 24, 2015. The Abe administration aims to cap increases in spending as it tries to rein in the world's heaviest debt load while sustaining a recovery from two decades of stagnation. Photographer: Kiyoshi Ota/Bloomberg

Rising housing investment is a sign that the Bank of Japan’s negative-rate policy is working, according to Bank of Japan Governor Haruhiko Kuroda. But it also has a lot to do with tax changes, and ironically, the increasing supply of new homes might drag down Japan’s inflation rate, the opposite of what Kuroda wants.

Speaking in June, Kuroda identified a big expansion in housing for rent as one of the good effects of negative interest rates, the newest tool in the bank’s arsenal, and one that has its fair share of opponents.

"The effect of negative rates is gradually spreading through the real economy, and we’ll see that becoming clearer," Kuroda said at a press conference in June. "Rental housing has been growing rapidly, but private homes haven’t expanded as much."

The rental market is already weak, however, and more apartments and houses are likely to push down rents more, further hurting inflation. With more than 10 percent of homes in Japan in 2013 empty and rents falling every month since October 2008, the new construction is coming in a saturated market. Some 34 percent of rental apartments in central Tokyo were vacant in June, according to Kazuyuki Fujii of TAS Real Estate, up from around 30 percent in early 2015.

One reason why this construction is increasing is a January 2015 change to tax laws that encourages people to build these kinds of properties to reduce inheritance tax. "It will produce more vacant houses and depreciate rent and CPI," former BOJ official Hideo Hayakawa said recently.

CPI data released Friday in Tokyo showed that consumer prices excluding fresh food, the central bank's core measure, fell 0.5 percent last month from a year earlier.

The BOJ noted the problem itself in a July outlook report, saying that "the increase in construction of housing for rent that is motivated by inheritance tax savings has led to a further rise in the already high vacancy rate of housing for rent, and this has generated downward pressure on private housing rent."

The effect of this on inflation is "not negligible," the BOJ said in the report. Rent itself is 2.8 percent of the CPI basket, and it’s also part of the calculation of imputed rents, which makes up more than 16 percent of the whole basket.

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