Back in the 1980s Japan found itself in an admirable, if unsustainable, position: the Nikkei was trading in the upper-30,000s (yes, three times higher than where it trades now after so much hyperbole), inflation was stable, the Walkman and Trinitron revolutions meant the Japanese export juggernaut owned the US, and the future seemed bright. So bright, in fact, that the country just had to make a statement not somewhere else, but in the middle of Manhattan…by buying that icon of capitalism, the Rockefeller Center.
Yes, yes, we did say “unsustainable” – very soon the brief “bright future” had its lights shut out, the Nikkei cratered, the Japanese demographic crush virtually assured a slow, deflationary death for the country, and Mitsubishi Estate’s purchase of Rock Center went from dream to nightmare.
Fast forward 25 years, when it appears that Japan is set to not only not learn from its own tragic past, but to repeat exactly the same mistakes it did in 1989 when in a moment of brief, irrational exuberance, it though that unsustainable is, in fact, sustainable.
Reuters reports that Japan’s public pension fund, the world’s largest with a pool of $1.1 trillion, and which until recently was the mystery buyer ex machina that was supposed to buy up the Nikkei past 16,000 and on its way to 20,000, 30,000 and more (a dream that fizzled as quickly as it appeared following our explanation that buying stocks means selling bonds), may start buying real estate to boost returns in a move that could involve tens of billions pouring into cities such as London and Paris. Or New York.
Any such plan by Japan’s Government Pension Investment Fund (GPIF) would come as the country’s government urges public funds to increase returns to help revive the economy, part of the game-changing economic policies of Prime Minister Shinzo Abe.
Earlier this month, the GPIF said it would shift away from bonds and into stocks to take on greater risk in the most significant shift in its asset allocation since 2006.
Property typically offers a higher yield, or rental income as a percentage of a property’s value, than government bonds because it is seen as a riskier investment that takes longer to buy or sell and faces the risk of becoming empty.
As central banks keep interest rates historically low, many government bond yields offer little or no return, prompting some investors to shift into real estate.
“It is striking just how much larger GPIF is than any of the word’s other pension funds … Therefore, if it ultimately expands its remit to include international real estate, it could become a very significant player,” CBRE said.
True: when gambling with people’s livelihoods in an assured asset bubble, for a society whose wealth-preservation options are evaporating by the day, the GPIF could certainly “become a very significant player.” And right after that it would become the most significant government-bailed out pension fund in history. That, or the limits of Japanese calmness would certainly be tested, when presented with the realization that the nation’s retirement capital has been gambled away.
Because what asset class is an even more assured asset bubble than the stock market? Why premium real-estate of course (just ask “tightening” China where housing has posted 12 months of constant price increases… let alone Hong Kong, London, New York, Zurich, Vienna or of course New York). And since central banks are already directly investing in stocks, what is the last bastion of the “all in” bubble mentality? Buying Stevie Cohen’s $100 million+ Bloomberg Building pied-a-terre of course (sight unseen).
So yes, while Japan is reliving its second, and last, moment of brief, monetary euphoria, someone (most likely a descendant of the same last name persuasion) will once again sell the Rockefeller Center to Japan: because this time will not be different. Although the only happy ending will be for those who sell high, only to rebuy much, much lower.