When the economy was growing like crazy in the 80s, Japan had the most expensive real estate on the planet, and the same zoning they do now.
Are you sure? From Financial Times[1]:
> During the 1980s Japan had a spectacular speculative house price bubble that was even worse than in London and New York during the same period, and various Japanese economists were decrying the planning and zoning systems as having been a major contributor by reducing supply,” says André Sorensen, a geography professor at the University of Toronto, who has written extensively on planning in Japan.
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> "To help the economy recover from the bubble, the country eased regulation on urban development," says Ichikawa. "If it hadn’t been for the bubble, Tokyo would be in the same situation as London or San Francisco."
[1] http://www.ft.com/cms/s/0/023562e2-54a6-11e6-befd-2fc0c26b3c...
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Edited to add: To your first point, if you restrict your consideration of Japan to Tokyo, you see the largest metropolis in the world with a growing population -- other cities in Japan are shrinking, but Tokyo is growing, yet Tokyo prices are steady. I'm not sure about its economic situation, but I wouldn't be surprised if Tokyo's economy was stronger than other parts of Japan. Regardless, it's important information that Tokyo alone is building more housing than the entirety of California (source: same FT article).
Very interesting article none the less! I find it a strange effect of the London housing market that it benefits property developers to under deliver in house building as the supply and demand situation will, even with brexit, mean increasing house prices. What can be done to get the incentives right?
Basically, underemployment, wage deflation, people leaving the workforce, rise in part-time labor, fall in full-time employment.
The GDP of the Tokyo metropolitan area is about 1/3 of Japan's total GDP. The country is weighted toward Tokyo like the UK is weighted toward London.
In the US, the center of finance is New York, the center of entertainment is LA, and the center of tech is Silicon Valley. In Japan, Tokyo is the center of all of those things, as London is in the UK.
First, that FT article is terrible. It uses a "desirable 20 sq km slice" of Tokyo as a proxy for the city's population growth, but in reality the city's population growth, by its own accounting, was flat from 1977-1997:
http://www.metro.tokyo.jp/ENGLISH/ABOUT/HISTORY/history03.ht...
Even since 1997 Tokyo's population hasn't grown quickly, going from 12M to 13.5M (12.5%) in 18 years (0.65%, annualized). By comparison SF is a boomtown, having grown by nearly 6% since 2010 (1.2%, annualized; that's nearly twice the rate of Tokyo over the same period):
http://sf.curbed.com/2015/2/4/9995388/sfs-population-is-grow...
Instead, the FT article manufactures a lie by explicitly comparing the population growth in one ward of Tokyo (again, Minato) to that of all of SF over 20 years. It uses this unfair comparison to conclude that SF is growing more slowly than Tokyo. It's possibly the most egregious example of cherry picking I've seen in the press in years.
So the FT article is not to be trusted. But what about that "astonishing fact" about housing starts being more numerous in all of California?
Turns out, it's way less astonishing when you realize that Japanese homes are essentially disposable - the average lifespan of a Japanese home is 38 years (compared to 100 in the US). There's no market for used homes in Japan, and homes become worthless after 15-30 years:
http://freakonomics.com/podcast/why-are-japanese-homes-dispo...
A culture of disposable homes is obviously going to have more construction than one where homes are treated as investments. But what about this zoning change that fixed everything, and made Japan safe for development again?
Oh...that law was passed in 2002, and it mostly had to do with encouraging re-development of blighted spaces in cities across Japan, as well as improving infrastructure and safety:
http://www.toshiseibi.metro.tokyo.jp/pamphlet/pdf/udt2013eng...
It does some useful things - like establishing a class of apartments with no key money or ridiculous deposit requirements - but it's wishful thinking to suggest that this law, passed in 2002, suddenly made Tokyo real estate affordable.
My argument stands. If you want to know why Tokyo land prices have stayed flat, look at the economy. Japan has been struggling to find growth for nearly two decades, its population is flat/declining, and it is struggling with deflation. Everything else is a detail.
Japan ranks 27th on GDP per capita (PPP), which is pretty good. In fact it's mostly a reflection of their unusually old and retired population. If you looked at GDP per capita excluding retired people, they would likely be in the top 15, maybe top 10.
"they're struggling with deflation"
Deflation normally leads to lower consumption and unemployment. Is Japan struggling with unemployment? Nope. 3.2% in Japan, which is incredibly low.
It's interesting how foreigners tend to have a distorted view of Japan's actual economic performance indicators. You can look at a lot of them, but ultimately what matters is that people have jobs and make money, so the unemployment rate and GDP per capita is what matters,¹ and Japan is doing very well according to both.
"population is declining"
That's the only factor you correctly identified. A shrinking population means lower demand for housing, hence lower prices.
¹ Actually some economists make the point that what matters is happiness, but it's hard to objectively measure it.
http://www.newgeography.com/content/005042-peak-people-japan
In any case, being able to live above your place of business on an urban street in Tokyo is a no-brainer improvement to quality of life for small entrepreneurs. It's a major reason why Tokyo remains such a livable city for so many people (30 million in the Tokyo-Yokohama megalopolis) despite the extended stagnancy in growth.
Because their products are wanted internationally, their elderly generation is parsimonious and has an almost religious belief in the state and all it stands for, and everyone buys domestic because it's basically the best quality around.
How is their economy in the toilet again?
To counter deflation (how many other countries have a deflation problem again?) you can just print money, free money. The only reason Japan can't print free money is because its citizens have so heavily invested in the state that it would be a political problem if you were to devalue their holdings on purpose.
Alternatively they could just collectively chill and simply not work so hard, but yeah, Japan.
Currency deflation is a First World+1 problem. It means your currency is harder than you'd like it to be. To even have that problem means your economy is stronger than any one economy that works on the basis of inflation.