The Potential of Japanese Farmland in Real Estate Portfolios

Japanese farmland has not been seen as an investment nor as a factor of agricultural production, as many privileged owners just abandon it while farmland property rights cannot be transferred easily due to the law; even so, Japanese farmland has the potential to become a long-term investment with the support of policy enhancement that will push forth farmland activation to possibly create a Japanese Food Valley. Using publicly accessible farmland data, this study analyzes the performance and portfolio diversification benefits of farmland in Japan over the 1986-2022 period. Statistics of the returns on farmland in general disappoint us with numbers around zero; however, there could have been portfolio diversification benefits for farmland components mixed with residential, commercial, or industrial land, even though some correlations are derived from data formed by modified criteria consistent with farmland regulations and the asset market bubble unique to Japan. Distinctively, the Hokkaido district with positive annual returns is found to have a significant negative correlation with other assets, reflecting greater portfolio diversification benefits. As a reference, this study also investigates the relationship between the returns on farmland and other traditional assets such as stocks and bonds. Farmland capital gain yields were not significantly correlated with those of stocks, although they showed some similarities to the significant correlations found between farmland and general land, reflecting the possibility of portfolio risk reduction. Significant correlations amongst the farmland and bonds reflect further portfolio diversification benefits, depending on the different characteristics of the two types of farmland values and the resulting positive/negative correlation coefficients. Such farmland value can be seen as a reflection of the distance from Tokyo, even though this is still within the scope of a hypothesis and needs our future consideration to establish scientific proof.