Real estate market rebounded firmly in 2011
We need to remember that the real estate and J-REIT sectors' firm performances since the start of 2012 are due partly to a steady recovery in the environment for the real estate market amid the disruptions caused by the Great East Japan Earthquake. We discussed this environment in parts 1 (on earnings), 3 (strong upturn in transactions) and 11 (office market recovering with increase in workers).

Expectations for escaping deflation; restoration demand
The BoJ's announcement of a de facto inflation target of 1% CPI growth has spurred the market to gather pace again. We think this development partly reflects investor awareness that firm markets in both 2003 and 2007 were due to expectations of an escape from deflationary conditions. We also think multiple factors are contributing, such as market conditions similar to those following the Great Hanshin Earthquake in 1996, when reconstruction demand buoyed share prices and economic conditions. We think real estate and J-REIT share prices have not started rising seriously yet.

Real estate, J-REIT sectors to turn up again following short-term correction
With the market looking overheated due to the major rise in share prices since start-2012, we expect to see a near-term correction. Thereafter, however, we look for the real estate sector to rise again. We reiterate our Overweight view on the real estate sector.

We determine our target prices for this sector by using a residual income model. We also take into account NAV. Risk factors include a rise in risk premiums due to a decline in bank lending to the real estate sector; a decline in government spending due to a hasty hike in the consumption tax, or to a rush toward fiscal restructuring; tax revisions or regulations that inhibit the liquidity of the real estate market; and the emergence of excessive pessimism toward Japan and Japanese real estate.

Eoin Treacy's view It is looking increasingly likely that following a number of false starts, the Bank of Japan is finally serious about weakening the value of the Yen against a wide basket of currencies. The adoption of an inflation target was a pivotal event and the greater than 10% decline in the Yen against the Dollar since early February can be seen as evidence of their commitment.

From a medium-term perspective, the current US Dollar rally against the Yen is no larger than those seen in 2008 and 2009. While it is occurring from a lower level and has spent more time above the 200-day MA than on any occasion in the last five years, the rate will need to find support above the trend mean on a significant retracement to confirm the trend change. Provided the BoJ retains its resolve, there is every reason to expect that this will occur.

As expected, this change of central bank policy has acted as a catalyst for investor interest in Japanese assets. The stock market has rallied impressively having retested its 2009 lows early in the year. The REIT sector, with its globally competitive yields (5.25%) has lagged on a relative basis. However, in absolute terms, it is also rallying towards the upper side of its three-year base and is currently testing the psychological 1000 level. It will need to hold a move above that area to confirm a return to medium-term demand dominance.