It was a hot Saturday afternoon and I had planned to meet a friend at a Starbucks at Raffles Place. It was one of those weekends I had to work and my friend was visiting Singapore for only a few days, so we figured this was the best opportunity for us to meet. Raffles Place was generally very quiet, as it usually is over a weekend. When I arrived at the Starbucks, there was only one other person there. He was very well dressed, sporting a blazer, which was quite unusual in Singapore, especially on a weekend.

He looked a little bored, and as my friend had not yet arrived, I went over and said hello after getting my coffee. He smiled and spoke with a somewhat American accent. He said he was from Japan and was visiting Singapore to view properties for investment. He said he was viewing some properties in the Raffles Place area and was waiting for his next appointment, later that afternoon, with an agent.

The property market had recently come back to life in Singapore and I knew there were foreigners who were investing in properties here, particularly in prime areas such as Raffles Place. However, I had the impression that many of these investors were wealthy individuals from developing countries such as Indonesia, India and China. I asked him what brought him all the way to Singapore to purchase property and why he did not want to purchase property in Japan.

He shook his head sadly and said that he thought Japan’s property market was a dead investment, at least in his lifetime. He worked in the financial sector and said that although Japanese companies remained global brands, its domestic economy has been suffering from deflation for almost two decades. Property and asset prices have been steadily falling. He explained that if you buy property in Japan, as time passes, it will get less valuable because of deflation. This has been the case for more almost 2 decades, apart from a brief recovery from 2005 to 2007.

He said that for those who are able to, making international investments had been the most sensible decision. In most other developed economies, properties can be expected to rise in value steadily, so one can be sure that the investment is safe. Furthermore, because of low interest rates, the Japanese yen has been steadily declining over the years. From the point of view of a Japanese investor, this means that a foreign investment has three benefits. First, the investment itself is more likely to rise in value than an investment in Japan. Second, as the foreign currency appreciates, the investor will be able to get more Japanese Yen in exchange. Third, as the Japanese economy is deflating, the Yen he gets at the future date will have more purchasing power at the time it is converted back. Thus, he said, it makes most sense for the Japanese to invest abroad or in foreign assets.

I had always known that Japan had been suffering from deflation, but this was the first time I had met someone who had actually explained how his individual decisions were affected by it. I guessed he must have been quite wealthy, as Raffles Place properties are amongst the most expensive in Singapore. He seemed like a sophisticated investor, and when I asked him more about his background, he explained that he had been to a well known business school in the US and had worked there for several years, so he had a more international perspective than most Japanese.

He also explained that the ‘lost decade’ in Japan has been much worse for many ordinary Japanese. Some of those who bought their properties in the late 80s and early 90s are now sitting on properties worth much less than what they originally invested and are unable to cash out on their equity for retirement. Some still have loans that exceed the value of their property, which makes it impossible for them to sell. The young Japanese generally do not bother purchasing property because they believe it is likely to decline in value. He wants to send his own children to University in the US, so they have more options.

My friend was rather late, but I was having such an interesting conversation that I did not realize the passing of time. Eventually, the Japanese man excused himself and left for his appointment. My mind was still buzzing at the end of the conversation and I wanted to better understand what had caused the Japanese economy to spiral into deflation, and whether there were any lessons for Singapore or the rest of the world to learn from this story.

Deflation and falling property prices may seem like alien concepts in Singapore at the moment, especially with the immediate talk being about rising prices and trying to cool the property markets. Yet, when I was growing up in the 80s, the value of Japanese real estate was legendary. I remember once hearing a story, which may be an urban legend, that the real estate value of the garden of the Emperor’s palace in Tokyo was worth more than the real estate in the entire state of California (the largest state in the US).

I may share any further thoughts I have on this in a subsequent entry.

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