Japan: Selected Issues
Author: International Monetary Fund
Publication Date:
13 Dec 2001
eISBN:
9781451820607
Language:
English
Keywords:
ISCR; CR; Japan; firm; real GDP; inflation target; land price; prices in Japan; real estate; Japan-REIT market; price trend; Inflation; Capital gains tax; Land tax
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The paper discusses the cures available for the economic malaise that can arise because nominal interest rates cannot be reduced below zero. However, a sufficiently high rate of target inflation can prevent the occurrence. The paper highlights a number of important issues in understanding the transmission of shocks between Japan and the Asia-Pacific region. Structural reforms, information technology, and medium-term growth prospects in Japan have been discussed. The paper traced some of the links between land prices and the financial sector, and economic activity.

Abstract

The paper discusses the cures available for the economic malaise that can arise because nominal interest rates cannot be reduced below zero. However, a sufficiently high rate of target inflation can prevent the occurrence. The paper highlights a number of important issues in understanding the transmission of shocks between Japan and the Asia-Pacific region. Structural reforms, information technology, and medium-term growth prospects in Japan have been discussed. The paper traced some of the links between land prices and the financial sector, and economic activity.

IV. Real Estate and the Macroeconomy in Japan 1

A. Introduction

1. The sharp and prolonged decline in land prices and values in Japan during the 1990s shattered the post-war “land myth” (Tochi Shinwa). Except in 1975, land prices rose almost continuously for 3¾ decades starting in 1955. During the heady half decade of the so-called “bubble” years beginning in 1985, land prices in the six largest cities rose by about 200 percent, contributing around 75 percent of the ¥1,000 trillion increase in household wealth (three times annual disposable income). However, with average annual declines of 10 percent for a decade, by 2000, prices had fallen back to their 1985 levels, wiping out an estimated ¥450 trillion in household wealth.

uA04fig01

Japan; Land Values by Sector

Citation: IMF Staff Country Reports 2001, 220; 10.5089/9781451820607.002.A004

Source: Economic and Social Research Institute.

2. Such real estate boom-and-bust cycles have also occurred in other industrial and emerging market economies. Herring and Wachter (1999) note that these cycles have contributed in many cases to banking sector weakness and crisis episodes. Most recently, weaknesses in banking systems in the aftermath of property market booms and busts were precursors to full blown crises in the East Asian economies. Indeed, the property price swings in the East Asian economies have been more pronounced compared to industrial countries, with real property price increases generally exceeding 20 percent a year compared to about 10 percent a year in the US or the larger European economies (BIS, 1997). More generally, property price movements have been closely related to the business cycle, and recessions in the European Union countries since the early 1980s have been associated with falling property prices (IMF, 2000). Case (2000) provides a useful recent discussion of the impact of real estate developments on the US economy.

3. This chapter examines the links between land prices, real estate, and the macroeconomy in Japan. It is organized as follows: Section B highlights the importance of land and real estate in the Japanese economy. Section C provides an account of real estate price developments in Japan during the 1980s and the 1990s. Section D examines the factors that have been used in the literature to explain price movements in Japan. The main focus of this section is on factors that drove price changes during the 1980s and the 1990s. Against the background of a continued depressed state of the real estate sector in Japan, Section E proposes steps to revitalize the market. Section F concludes.

B. Land and Property Prices in Japan2

4. Land is overwhelmingly the household sector’s largest store of wealth in Japan. While the share of land in total wealth has fluctuated with changes in asset prices and developments in the stock market, the share of land in household wealth has remained high. Even after the significant decline in land prices during the 1990s, the share of land in wealth in Japan remains relatively high compared to other major industrialized countries.

uA04fig02

Composition of Household Assets (In percent)

Citation: IMF Staff Country Reports 2001, 220; 10.5089/9781451820607.002.A004

Sources: Economic and Social Research Institute (Japan); and Federal Reserve Board (U.S.).

5. The ratio of land value to other economic aggregates is also relatively high. The ratio of land value to GDP and household income in Japan is higher than in other industrialized countries. Thus, while the land value-to-GDP ratio in the US fluctuated between ¾ and 1 during 1970-2000, the ratio in Japan rose from around 2½ in 1970, and peaked at about 5½ in 1990 before declining to 3¼ in 1999. This ratio—at about 4—remains especially high in the Tokyo region. The high land prices are also reflected in the higher ratio of acquisition cost to annual incomes. While new housing prices in the US average around 3½ times annual income, the comparable ratio in Japan is about 4½ (Kanemoto, 1997). This overall ratio is roughly the same as in the UK, Germany and France. But the ratio in Tokyo, at 7½, is high.

6. Given its large share in household wealth and corporate financial position, land values play a pervasive role in economic decision-making. Fluctuations in land values generate changes in household and corporate balance sheets, income streams, profitability, and stock market valuations. Furthermore, given the extensive use of land as collateral for bank loans, changes in land prices strongly affect bank balance sheets and behavior.

C. Land Price Developments

7. Excluding 1975, land prices in Japan rose continuously during the post-war period until 1991. Within this overall trend increase, real estate prices exhibited growth cycles. These growth cycles can be associated with factors such as differing speeds of economic growth, pace of urbanization and regional development, and the stance of economic policies (Yamada, 1993).

uA04fig03

Japan: Land Price Index in Six Largest Cities

Citation: IMF Staff Country Reports 2001, 220; 10.5089/9781451820607.002.A004

Sources: Japan Real Eatadc Institute; and staff estimates.

8. Land prices boomed during the latter half of the 1980s. During this dramatic boom, the earliest and largest price increases were for commercial property. Rising incomes in the financial sector generated demand for urban housing closer to the commercial districts. The sharp increase in land prices began in the commercial district of central Tokyo, and then fanned out to the residential suburbs of Tokyo, the commercial areas of Osaka and Nagoya, and to the other major cities and local areas. In all these areas as well, commercial land price increases preceded residential land price increases. Compared to its level in early 1985, the national price index rose by about 60 percent to peak in late 1991. The increase in regional land price indices varied across prefectures, and ranged widely between 20 percent for the more distant prefectures and over 200 percent for the Osaka metropolitan area.

uA04fig04

Japan: Land Prices in Six Largest Cities

Citation: IMF Staff Country Reports 2001, 220; 10.5089/9781451820607.002.A004

Sources: Japan Real Estede Institute; and staff estimates.

9. The subsequent decline in land prices, which started in the early 1990s, was historically unprecedented for Japan. Land prices have fallen in every year since 1991, and in all prefectures—with those prefectures that experienced the largest upswings generally witnessing the largest falls. The price declines were as dramatic as the increases. By late 2000, the national land price index and the prefectural land prices indices had fallen back to their mid-1985 levels. The decline has spanned all segments of the market, with the largest annual declines in the commercial segment.

10. In some respects, the decline in property prices in Japan was similar to other countries. A cross-country comparison of property price changes suggests that the magnitude of the property price swings in Japan was not significantly out of line with that experienced by other countries. Indeed, a number of other countries appear to have had larger price swings. The comparison also establishes the greater volatility of the commercial property prices relative to residential property prices.

Property Price Cycles: A Cross-Country Comparison 1

article image
Source: Bank for International Settlements, 71St Annual Report, 2001.

Cycles defined by peaks and troughs of property prices.

Percentage changes over the relevant period.

Data typically refer to major cities.

Property prices refer to land only.

No trough identifiable; calculated to end-2000.

11. On other counts, however, the real estate market evolved quite differently. For one, the duration of the price decline has been much longer. Land prices in Japan have declined continuously for about a decade, and appear to be have bottomed out only recently in a few wards of the Tokyo metropolitan area. Moreover, these price declines have been accompanied by a stagnation in the level of market activity. This impression of stagnation is confirmed by a number of indicators, including the number of land transactions. Relative to the earlier decades, the volume of real estate transactions fell, nationally and in all major metropolitan areas.

Number of Land Transactions (average annual, thousands)

article image
Source: Ministry of Justice.

D. Explaining Land Prices in Japan

12. The empirical literature uses demographic and physical characteristics to explain, in part, the high level of land prices in Japan. Relative to its GDP and population, the habitable area in Japan is very limited. For comparison, while Japan’s population is about half that of the United States, the land area is only about 4 percent. The habitable area is smaller still, about 1/60th the size of that in the United States—an area about the size of South Carolina. Japan’s population per unit of habitable land is, therefore, about 30 times that of the US, while its GDP per unit of habitable land is around 20 times as large.

13. High land prices may also be rationalized in terms of economic fundamentals. Boone and Sachs (1989) and Kanemoto (1997), for example, suggest that land prices would be high in a country with a higher growth rate, as the land rent in this country would grow more quickly. This result is along the lines of a standard growth model, according to which economies with some combination of low time preference, high productivity growth, and low property tax rates should be expected to have high land values relative to national income and output aggregates. In the context of a simple growth model, the value of land can be related to GDP as follows:

Landvalue=αi+η−θGDP

assuming that that land rent is a constant fraction, α, of GDP and grows at the steady state growth rate; i is the interest rate; η is the property tax rate; and θ is the rate of increase of land rent (and the steady state growth rate). To compare Japan and the US, Boone and Sachs suggested the following parameter values: real interest at 5 percent in both countries; expected growth rates of 4 percent and 2 percent, respectively; and effective property rates of 0 percent and 2 percent, respectively. With these parameter values, land value in Japan could be expected to be about 4 times that in the US. These estimates are, of course, very sensitive to the assumed parameter values, in particular, to the difference between the assumed real interest rate and growth rate.

14. Still other explanations of the high land prices relate to policy distortions. These distortions discourage a more efficient use of the available land, thus contributing to high land prices. These distortions relate to features of the tax system which create low holding and high selling cost of land, aspects of the regulatory regime such as zoning and building code restrictions which lead to underutilization of existing land, and tenancy and land lease laws which thwart market turnover especially in the residential housing market. These factors are discussed more extensively in Section E.

15. The factors which are used in the empirical literature to explain price trends are similar to those that help explain the high level of land prices. Movements in land prices have been explained using monetary aggregates including bank lending; income and expenditure aggregates; demographic factors; stock prices and bond yields; and rental values.3 Additional variables such as the business creation rates are often included for commercial real estate prices. Along these lines, Ito and Iwaisako (1995) estimate models in which the real GDP growth rate, inflation, interest rates, and the growth of outstanding real bank loans to the real estate sector explain over 80 percent of the variations in real land prices. A number of recent studies also focus on whether land price movements have deviated from fundamental values—especially during the 1980s and the 1990s—with differing conclusions. Stone and Ziemba (1993) argue that these movements were consistent with fundamentals. They suggest that movements in short and long-term interest rates can account for both the land price boom of the late 1980s and the subsequent bust, In contrast, Ito and Iwaisako (1995) argue that the price cycle cannot be explained by fundamentals alone.

16. To explain price developments during the 1980s, recent analyses examine more closely the links between land prices, the real estate sector, and the banking sector. These studies suggest that financial liberalization and easier monetary conditions contributed to the land price boom of the 1980s (Hoshi, 2001; Ueda, 2000; and Hoshi and Kashyap, 1999). The deregulation of financial markets in the mid-1980s generated the perception that Tokyo would soon develop into a major international financial center and prompted the entry of a number of foreign companies, especially securities firms. The increased demand for real estate was boosted by easier monetary conditions. These easier conditions materialized as the Bank of Japan, concerned over the likely adverse effects of the yen appreciation in the aftermath of the Plaza Accord of September 1985, lowered its discount rate to historically low levels in a series of monetary easing steps. The low interest rates fueled a sharp increase in private sector credit growth.

uA04fig05

Japan: Share of Bank Loans by Industry

Citation: IMF Staff Country Reports 2001, 220; 10.5089/9781451820607.002.A004

Source: Bank of Japan
uA04fig06

Japan: Share of Real Estate Lending in Total Loans, by Bank type

Citation: IMF Staff Country Reports 2001, 220; 10.5089/9781451820607.002.A004

Source: Ueda (2000).

17. Changing financial market conditions sparked a change in banks’ lending behavior. With capital account liberalization and the entry of foreign financial institutions, banks lost a number of their traditional, large corporate customers to alternative financing sources. In response, the banks increasingly directed their lending activity towards smaller firms and the real estate sector. While all financial institutions increased their exposure to real estate, the share of real estate lending in total loans became especially high at the long-term and trust banks and continued to increase during the 1990s even after land prices had begun to fall. However, as economic conditions deteriorated and land prices continued to fall, a substantial volume of these loans turned sour. For example, at end-March 2001, of the total disclosed nonperforming loans (NPLs) at 16 major banks, one-third were to the real estate sector.

18. Recent empirical work confirms the existence of a strong correlation between land prices, the composition of banks’ portfolios, and the ratio of bad loans. For example, using panel data for city, regional, long-term, and trust banks, Hoshi (2001) finds that the annual increase in the ratio of lending to the real estate sector to total loans was positively related to land price inflation and rose as the opportunities to lend to large corporate borrowers diminished. The analysis also finds that banks which were diversified into overseas markets fared better in maintaining sound loan portfolios. Ueda (2000) presents evidence to suggest that the bad loan ratio was higher for banks in regions with greater swings in land prices, with more use of land as collateral, lower capitalization ratios, and a more limited branch network.

19. A number of factors contributed to prolonging the period of price decline. In the initial years of the downswing, there was considerable optimism that the downturn would be temporary. Even after this view came under pressure from the persistent price declines, a quick adjustment in real estate prices, including through increased sales—which in other country episodes of boom-and-bust cycles helped the market bottom out quickly—did not take place. In other such episodes, the quicker adjustment in real estate prices was often precipitated by the banks which, as creditors, took the initiative against their weak borrowers. In the event that the banks were unable, or unwilling, to cope with the situation, bank regulators, aided with public resources, stepped in to move forward the process of attaching and liquidating collateral. These processes did not materialize in Japan at an early stage.

20. Regulatory forbearance prolonged the real estate downturn. More stringent regulatory standards and their strict enforcement would likely have forced banks much earlier in the decade to recognize the deterioration in their balance sheets. This would have caused a greater volume of land collateral appearing on the market for liquidation, stimulated market transactions, and generated downward pressure on real estate prices. The prompt corrective action clause was introduced through an amendment of the banking law to make the regulatory approach more transparent and rule based only in April 1998 to remedy the situation. Regulatory supervision of the banks may also have been lax because the regulators’ options were circumscribed by the nonavailability of public resources to resolve banking sector problems until a much later stage. In this context, Ueda (2000) suggests that, initially, there was considerable public opposition to the use of budgetary resources to assist the banks. Even after it was acknowledged that the use of public resources was inevitable, it was initially expected that only the credit cooperatives and the housing finance companies (jusen) needed capital injections, and that the major banks could deal with the situation with their own resources. It was not until the collapse of large banks and securities companies in late 1997 that the problem was recognized as being more systemic and as requiring more public support.

21. The banks did not accelerate the adjustment process for a variety of reasons. Their heightened exposure to the real estate sector after the lending spree of the 1980s meant that aggressive action against borrowers would have weakened their own loan portfolios and balance sheets. This reluctance to take action was exacerbated by banks’ substantial cross-shareholdings. Had the banks moved to expose the weak financial positions of their borrowers, it would have affected the stock market valuation of these borrowers which, in turn, could have undermined the banks’ own financial position. Faced with this situation, the banks often engaged in “evergreening” of loans to otherwise bankrupt borrowers. This lack of early recourse to liquidation of land collateral also contributed to a thin volume of market transactions and obviated a key source of downward pressure on real estate prices. Even in the current state of the market, a number of banks appear to be taking a wait-and-watch attitude.

22. The institutional setup to deal with distressed borrowers was also unhelpful for generating early results. Against the historical background of persistent price increases, the resolution mechanisms were not geared to facilitate the adjustment process. Even if the banks had been willing to take action against bankrupt borrowers, foreclosure procedures could be expected to be prolonged and unwieldy. The situation required a speedier, Chapter 11-style resolution mechanism, which was finally set in motion with the adoption of the Civil Rehabilitation Law in April 2000.

E. Revitalizing the Real Estate Market: Some Policy Considerations

23. The continued moribund state of the real estate market has generated extensive comment and policy concerns. We examine four areas in which policy action could help rejuvenate the real estate market in Japan.

Resolving nonperforming loans

24. The resolution of nonperforming loans is critical to the restoration of robust market conditions in the real estate sector. The recent reform blueprint of the Council on Economic and Fiscal Policy, with its emphasis on the “definite and final” disposal of NPLs over a two-year period, is a welcome policy commitment of the new government. Over the long run, an accelerated pace of corporate restructuring and banking sector reform would contribute to improving liquidity conditions in the real estate market. Stricter loan classification by the banks, including through forward looking provisioning, would help identify weak and unviable firms that need to be targeted for restructuring or bankruptcy so that credit lines to the viable entities can be reactivated. In the short run, it is likely that a resolution of these NPLs and the associated unloading of real estate on the market would further depress prices. However, this may be unavoidable if the market is to witness a turnaround. The experience of other countries has been encouraging in this regard. In the case of the US, for example, sales through competitive auctions of the failed savings and loan associations’ assets by the Resolution Trust Corporation began quickly, and the disposal of distressed assets peaked in 1991 (BIS, 1997). Although, these sales contributed to a weakening of the real estate market initially, the market picked up relatively soon, in part because of the Federal Reserve’s low interest rate policy.

25. The recent efforts of the Financial Services Agency to coordinate the resolution of the banks’ bad loan problem with corporate restructuring agreements fills an important gap in the process. The Civil Rehabilitation Law should also provide greater hope of survival to companies after entering bankruptcy and strengthen incentives for voluntary entry into the proceedings. Recent reports that an increasingly larger number of companies with substantial bad debt at major banks are likely to seek bankruptcy protection is an encouraging sign. This process would also benefit from a close examination of the bankruptcy and collateral laws to remove obstacles to speedy acquisition and liquidation, and recovery of fair value, of loan collateral. The introduction of institutional mechanisms such as the Private Servicer System (PSS), which was introduced in October 1998, would also help. By extending the function of loan collection activities to private companies, the PSS broke the monopoly that lawyers held in this area and eliminated a key bottleneck to loan collection posed by the limited number of lawyers in Japan.

Broadening the real estate market

26. There is considerable scope to increase investor participation in the real estate market. The market has traditionally been dominated by large, integrated companies which overlook all aspects of the business and are closely related to the banking system through client relationships and cross-shareholdings. This dominance could be reduced, including through allowing participation by new entities and issuance of new financial instruments.

27. Some recent steps to expand resource flows into the real estate sector include:

  • The establishment of Special Purpose Companies (SPCs) was permitted under the Land Liquidation Law passed in September 1998. The SPCs can be set up specifically for the disposal of land collateral. These companies have lower minimum capital requirements and are exempt from corporate income tax as they are required to pay out more than 90 percent of profits in the form of dividends. The shares of SPCs are regarded as securities and are generally better received than shares of real estate companies on account of favorable tax treatment of capital gains. The SPCs can also issue commercial paper against the anticipated income streams from properties that they hold. This commercial paper can be held by financial institutions, thus facilitating resource flows into the real estate sector.

  • Corporate-type investment trusts were introduced in December 1998. These instruments are an improvement over the features of the contract-type investment trusts in that they constitute direct investment in trust companies and are tradable on the stock exchange. Purchase of shares of SPCs or listed real estate companies through corporate investment trusts is similar to a US real estate investment trust (REIT).

  • The REIT law became effective in November 2000. The development of a Japan-REIT market is expected to help deliver much needed liquidity to the sector from equity markets. It is also intended to encourage the separation of development, ownership, and management functions—all of which are currently handled by the comprehensive real estate companies. The REIT market developments have been encouraging. With the start of the market on April 1,2001, most major real estate companies have announced plans to establish REITs. However, further improvements in the tax and regulatory structures, including reduction in real estate transactions taxes and strengthening of disclosure rules for asset-backed securities may still be required to foster market development.

  • Recent moves by the Resolution and Collection Corporation (RCC) would help expand the market for real estate securitization. In early 2001, the RCC moved to securitize the headquarters of the Long-Term Credit Bank—its first move to repackage real estate collateral. This option improves upon sales by auctions or through foreclosure by making the assets under liquidation more accessible to small and medium-sized investors.

Regulatory regime

28. Regulatory limitations on land use have restricted habitable land and livable space in Japan. Tokyo is a striking example of the impact of these restrictions where, despite high land prices, there is a considerable amount of undeveloped and inadequately used land. Moreover, the legally allowed capacity is not utilized fully. Thus, compared to the legally allowed floor-to-land area ratio of over 240 percent, the actual use is under 100 percent.

29. Zoning regulations and building codes, especially in the larger cities, could be further liberalized. Such liberalization—subject to safety requirements—would permit the consolidation of small and vacant lots and make it possible to plan large-scale housing or commercial development projects. Notwithstanding some steps to liberalize restrictions in 1997, real estate developers have continued to argue that restrictions placed by the Building Standard Law on the position, height, and shapes of buildings need to be reconsidered to permit the construction of more profitable structures in city centers. The newly created Urban Rejuvenation Headquarters—to be led by the Prime Minister—could play a useful role in this area if the guiding principles could be articulated clearly and converted into concrete action plans at an early date.

30. Another key area for action is the law on rentals and land-leases. Until their replacement by the Land and House Lease Law in 1991, the Land Lease Law and the House Lease Law gave heavy precedence to tenants’ rights and made it extremely difficult for landlords to reclaim the use of their property except for “rightful cause”—an event that has been interpreted very narrowly by the courts (Ito, 1997). This has discouraged more active investment in residential housing and made arduous the process of converting old structures into new, more efficient housing. The tenancy laws have also discouraged a more active property rental market. The introduction of the fixed-term land lease in September 1991 and the fixed-term house lease in December 1999—which permits the landlord to terminate a lease at the end of the stipulated period—is a welcome development. However, the law is applicable only to new leases.

Land taxation system

31. Various elements of the land taxation system were changed in the 1991 land tax reform. Following the sharp land prices increases in the late 1980s, the Land Tax Law was enacted to increase the tax burden on real estate. Among other changes to the tax rates and provisions, a national tax on landholding called the Land Value Tax was introduced. In view of the depressed conditions in the real estate market, the tax has been suspended since April 1, 1998. The 1991 tax reform notwithstanding, the current land taxation system continues to generate distortions in land use and prices and is a significant source of tax-induced non-neutralities (Dalsgaard and Kawagoe, 2000). Further reform of the land tax regime would help improve land use efficiency.

32. Phasing out the asymmetry between the inheritance tax rate on land and other assets would help eliminate a key distortion. Distortions in the inheritance and capital gains tax systems provide “tax shelter value” (TSV) to land in wealth portfolios (Nishimura, et al, 1999).4 This TSV of land for farm families is estimated to have peaked at about 340 percent in 1991—a level that leads to a reservation price on land 4½ times the market price. With the decline in land prices and tax changes, the reservation price is estimated to have fallen, but is still high relative to the market price. Removing this asymmetry would contribute to a faster conversion of agricultural land to other uses.

uA04fig07

Japan: Tax Shelter value of Land

Citation: IMF Staff Country Reports 2001, 220; 10.5089/9781451820607.002.A004

Source: Nishimura, et al (1999)

33. Streamlining capital gains tax rates on land would help reduce the long holding-period bias. While the structure of the capital gains tax for land has been changed during the 1980s and the 1990s, the structure of the tax schedule still encourages long-term holding, especially for individuals. Specifically, the tax rate for “ultra” short-term holding period (defined as less than 2 years) is higher than the rate for short-term holding (2–5 years). With prices falling and speculative activity much less of a concern, consideration could be given to making the tax rates neutral to the holding period.

34. Transactions taxes could be further reduced. In Japan, real estate purchases are subject to three types of transaction taxes: acquisition taxes levied by the prefectures, the national registration tax, and the stamp duty. In the case of residential housing, these taxes are levied on new purchases as well as used homes. The amount of these taxes depends on the value of the house, and is typically around 2 percent of the value of the house. But, the tax rate can be higher in the case of more expensive properties (upwards of 5 percent), and tends to dampen market transactions. In addition to these transaction taxes, households which move homes have to pay a capital gains tax even if the value of the new house exceeds that of old property. These tax rates are on the high side: for houses owned for less than five years, for example, these rates are upwards of 50 percent. The high transactions and capital gains taxes have contributed to infrequent moving and used home purchases, leading to a thin secondary market in residential housing. While the registration tax was reduced during 1998-99, there may be scope for further reductions. The capital gains taxes could also be reviewed for possible reduction and could be deferred if the sales proceeds are reinvested, as is the case of some other countries.

F. Conclusions

35. The current problems of the Japanese economy are intricately linked to the prolonged decline in real estate prices during the 1990s. This chapter traced some of the links between land prices and the financial sector, and economic activity more generally. The continued depressed state of real estate prices and market conditions in Japan has focused attention on steps to arrest the decline in prices and help bolster the financial position of corporations and banks, including measures to resolve nonperforming bank loans and to improve the flow of resources into the sector through securitization of real estate. From a somewhat longer term perspective, the regulatory and land taxation regime have also come to the fore as structural impediments to efficient land use. Policy reform in these areas would help create a vigorous and efficient real estate market in Japan.

References

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1

Prepared by Sanjay Kalra (ext. 36142).

2

The land and property systems in Japan are somewhat different from those in other countries. While in most other countries the land price is a residual of the property price, in Japan the land and the building are priced separately. Land prices are normally determined by market comparisons using official land price indices (OLPI) prepared by the National Land Agency. The Japan Real Estate Institute (JREI) also complies a number of land price indices. For a description of the OLPI and JREI indices, see Stone and Ziemba (1993) and Okamura (2000).

4

While inheritance taxes on financial assets are levied at market prices, taxes on land are assessed at 40–60 percent of market value. Farm property is subject to more favorable treatment. The assessed value of farmland in the Tokyo metropolitan area, for example, is estimated at less than 1 percent of the market value. Moreover, if inherited land is used as farmland for more than 20 years, inheritance tax payment is waived.

Same Series

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Cover IMF Staff Country Reports
Japan: Selected Issues
Author: International Monetary Fund
Volume/Issue:
Volume 2001: Issue 220
Publisher:
International Monetary Fund
ISBN:
9781451820607
ISSN:
1934-7685
Pages:
119
DOI:
https://doi.org/10.5089/9781451820607.002

Japan; Land Values by Sector

Composition of Household Assets (In percent)

Japan: Land Price Index in Six Largest Cities

Japan: Land Prices in Six Largest Cities

Japan: Share of Bank Loans by Industry

Japan: Share of Real Estate Lending in Total Loans, by Bank type

Japan: Tax Shelter value of Land