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Japan house price crash: Can weak yen attract enough foreign investment to inflate another property bubble?

By Ryan Hogg

Edited by Jekaterina Drozdovica

15:59, 13 October 2022

Regular houses in Kyoto
Japan house price crash: Can weak yen attract enough foreign investment to inflate another property bubble? Photo: AndrejLV / Shutterstock

Japan is enjoying an unconventionally hot property market amid foreign stimulus and increased demand. But clouds are on the horizon.

With a yen that has fallen 20% against the US dollar, Japan’s already-strong attraction to foreign real estate investors could be amplified. Will it cause a Japanese housing bubble

History of house prices in Japan

Japan real estate history demonstrates a unique trajectory in the 21st century, with prices declining for large periods of the last 20 years. 

The country’s house price index peaked in the first quarter of 1991. This turned out to be the end of a period of growth following a decade of a Japanese asset price bubble, leading to what became known as a “Lost Decade” in the country, where the economy stagnated and prices deflated throughout the 1990s.

Residential property prices in Japan, 1960 - 2022

This was in part caused by Japan’s decision to hike interest rates above 6%, abruptly sapping liquidity from the market and causing sharp defaults.   

Prices nearly halved in a continuous decline through to the first quarter of 2009, before staying largely stagnant in the 2010s, a problem unique to Japan house prices history. 

But like many property markets across the globe, Japan house prices have been kicked into gear by fresh liquidity in financial markets, low-interest rates and the increased demand for space during lockdowns. In March 2021, the Kensho Investment Group wrote about the Japan property market:

“Despite high macroeconomic volatility and the upheavals caused by the pandemic, investments in residential real estate in Japan in 2021 once again proved to be sustainable and resilient assets.

“The corresponding increase of interest from domestic and foreign institutional investors added to pressure on the capitalisation rate. For new investments, investors should pay attention to the diverging rental trends and choose to build a diversified residential portfolio as a viable strategy.”

Land Institute of Japan data cited by GlobalPropertyGuide showed prices rose in the country by 3% in 2020, before jumping by 6.9% in 2021.  

Now, prices are back at 20-year highs. Japan hasn’t enjoyed its current rates of growth since prices began to inflate in the 1980s – an expansion analysts are crediting to strong levels of foreign investment. Inevitably, there are worries this could trigger the next Japan housing market crash. 

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Will interest rate hikes and a bleak outlook cause a Japan housing market crash?

Inflation is beginning to eat into Japan’s economy as some global pressures make their way to the country’s shores. Latest Cabinet Office data shows prices rose by 2.8% year-on-year. While that’s a fraction of the increases seen in the UK, the US and the EU, it represents the fastest price rises seen in Japan since 2014. 

Japan has historically dealt with minimal inflation and even deflation, tied in part to the country’s ageing population. Price rises above the central bank’s target rate of 2% will cause some discomfort. That has intensified as prime minister Fumio Kishida ordered fresh stimulus to help the economy continue its rebound, as Bloomberg reports, putting more pressure on policymakers.  

Japan’s central bank, the Bank of Japan (BoJ), has held off on increasing its base interest rate. The bank instilled negative interest rates for a number of years and rates close to zero for more than a decade as deflationary pressures long present in Japan spread around the globe.

Rates stayed at -0.1% after the bank’s sixth meeting of 2022, with limited expectations from ING that this would change in the final months of the year. 

The central bank’s inaction has contributed to a fall in the yen's value. The currency is down 20% against the dollar this year. That decline has put more pressure on vital food and energy imports, which are prone to the most volatile upticks in prices.

USD/JPY price chart

That downgrade may not be a disaster for the economy, particularly one that has been starved of vital tourist income for more than two years. ING senior economist Min Joo Kang wrote in a note that “incoming travel demand could work favourably for the nation's economy if border restrictions are lifted”.


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On the property side, a weakening yen may also encourage more foreign investment in the country’s property sector, particularly as Western markets show signs of correction. That could be enough to trigger a Japan real estate bubble.

Japan was already an attractive market thanks to the rest of Asia’s restrictive attitude to foreign real estate investment.

“Japan is a safe haven for wealthy individuals in Asia,” Mori Nishimura of Housing Japan told GlobalPropertyGuide. “Nowhere else in Asia can you buy freehold land as a foreigner.”

The report said most foreign buyers in the country come from Singapore, Malaysia, Thailand, Hong Kong and Mainland China, while there was growing interest from the US, Australia, Western Europe, Taiwan and Indonesia.

A Savills investment guide for the Japan real estate market reinforced the idea that the market was popular for foreign investors, benefiting from increased liquidity through Covid-19. The group said:

“Indeed, during the pandemic, Japanese real estate garnered significant levels on interest from international investors, especially in the logistics and residential sectors, which has caused cap rates to compress further. Japan’s attractive funding options have similarly helped the country to remain popular and competitive amongst peers in Asia as a destination for foreign capital.”

Japan’s economy also got a renewed seal of approval from Fitch Ratings, which reaffirmed the country’s ‘A’ rating with a stable outlook. The agency saw limited risk in Japan’s economic outlook, reducing the likelihood of a Japan housing market crash. 

Japan housing crash predictions for 2022, 2023 and beyond

Despite undertones in the market that could inspire a Japan housing market crash, there is an acceptance that several factors could affect the trajectory of the country’s house prices.

Hideaki Hirata, professor at Hosei University and a former BOJ economist, told Bloomberg: “We will observe a globally synchronized housing market downturn in 2023 and 2024.”  

Some analysts were expecting supply to play a part in Japan’s housing market cooling. Nikkei Asia reported research from the Nomura Research Institute, which predicted the number of dwelling units in the country would rise to 65.46 million in 2023, up from 62.41 million in 2018. 

Ken Miura, professor at Kyoto University, told the publication that the number of excess housing units in the country could rise to 20 or 30 million. That would be expected to put downward pressure on prices.

As of 13 October, Trading Economics predicted a decline in house prices over the next year, but not enough to be defined as a Japan real estate crash. The site expected the residential property price index to trend around 125 points next year, a 3.8% decline on expected prices at the end of this quarter. 

In an August forecast, Knight Frank positioned Tokyo, the Japanese capital, as one of the lower growth cities, with projected property price gains in 2023 of around 2%. Other APAC markets, including Singapore, Shanghai and Seoul, were expected to outpace Tokyo.

The Urban Land Institute (ULI) was sceptical of the Japan housing market. The group expected Japan’s real estate GDP to grow the second fastest of six APAC regions, expanding at 2.25%. ULI Asia Pacific president David Faulkner wrote:

“We believe Asia Pacific will continue to be on an upward trajectory between this year and 2024, pointing towards a sustainable recovery following the pandemic. Even so, short-term tailwinds remain, as inflation rates in the region’s largest economies are projected to accelerate rapidly.

“Against this backdrop, we are expecting the real estate sector to remain resilient in the next few years, with largely stable capitalisation rates across the office, logistics, and retail segments.”

Japan’s luxury real estate sector is expected to register consistent growth in the longer term. Mordor Intelligence expects luxury home prices to grow at an annual average rate of 3% between 2022 and 2027.

Note that analyst predictions about Japan's housing market can be wrong and shouldn’t be used as a substitute for your own research. Always conduct your own due diligence before trading. Keep in mind that past performance is no guarantee of future returns. And never invest money you cannot afford to lose.


Why did Japan's housing market crash?

Japan’s housing market last crashed at the start of 1990, when inflated asset prices burst and the central bank hiked interest rates.

Are house prices falling in Japan?

House prices are growing in Japan, rising by 1.75% in the second quarter of 2022.

What caused the bubble to end in Japan?

The last bubble in Japan was in part ended by a hike in interest rates towards the end of the 1980s, inspiring a correction in asset prices that led to a downturn that lasted a decade.

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