The Golf Bug Is Biting Japan Again

Goldman Sachs and other investors are cashing in as the Japanese start spending serious yen

Few things better symbolize the crazy, speculative excesses of late-1980s Japan than golf. Memberships at the best clubs pushed $4 million, and scores of companies -- from small-time developers to blue chips such as Matsushita Electric Industrial Co. (MC ) -- built or bought courses all across the archipelago.

Just like other assets, memberships were traded freely and valuations soared. The Nihon Keizai daily even came up with a golf membership price index that links lovers followed as closely as stock tables. But that all came screeching to a halt in the 1990s, when Japan's economy found itself in a Sahara-sized sand trap. Plummeting land values wiped out many course owners, and by 2003 the Keizai golf index had dropped by 95%.

Now that Japan's economy has started to recover, golf is making a comeback. The Keizai index is up 37% over the past 18 months, and new money is pouring into the sector. Visitors teeing off at Japan's 2,400 golf courses increased 2% in the year through March, after falling by as much as 6% in four of the past six years. Meanwhile, the number of rounds played in Japan has stabilized at around 80 million per year, though that's still well below the 1993 peak of 100 million. In the bubble years, "people were buying golf memberships as investments, but now they're buying them because they want to play," says 58-year-old golfer Kunio Shimada.

The turnaround is likely to mean big profits for two unlikely investors. Investment bank Goldman Sachs Group Inc. (GS ), which spent sizable sums acquiring failed golf courses in Japan earlier this decade, is cashing out. On Nov. 1, Goldman plans to sell shares in its Accordia Golf Co., which now owns 91 courses. Although golf looked like a bizarre bet back when Japan was in the doldrums, it looks smart now as the share sale may raise as much as $1 billion. And U.S. private equity house Lone Star Funds raised about $340 million last year when it sold shares in Pacific Golf Group International Holdings, which is Japan's biggest golf company, with 99 courses.

In addition to the economic turnaround, the golfmeisters have demographics working in their favor. Japan's cash-rich baby boomers are about to retire. By 2010, Japan's sixtysomething male population will jump by 22% -- to 8.7 million. And while men are nearly six times as likely to play golf as women in Japan, more women are taking up the game. "Playing takes concentration, and you forget everything but golf," says Hiroko Asami, a 60-year-old who got the golf bug four years ago. For her membership at the Itsukaichi Country Club 50 miles west of Tokyo, she paid $8,500 -- about one-tenth what it would have cost during the bubble.

Although prices have fallen, Japan's 11 million golfers are still willing to spend serious yen to get out to the tee. Membership at the hyperexclusive Koganei Country Club in suburban Tokyo will set you back a cool $680,000 -- down from a peak of $3.8 million in the bubble years, though still outrageous for the typical golf-loving salaryman. Even less expensive clubs are able to raise their prices. "An increasing number of individuals are now prepared to pay membership fees of $25,000 or more -- a big change from a year ago," says Yaeko Sagawa, president of Sakura Golf, which trades golf club memberships.

That's helping the bottom line of golf course operators. Pacific Golf Group expects profits of $77 million on sales of $565 million this year, up from earnings of $33 million and revenues of $517 million last year. And Goldman's Accordia is projecting net profits of $86 million from sales of $574 million this year, compared with $37 million on sales of $366 million last year. Not a bad score.

By Ian Rowley,with Hiroko Tashiro in Tokyo

    Before it's here, it's on the Bloomberg Terminal.