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The Growing Appeal of Gold in Japan

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By Osamu Hoshi

Japan has long been characterized by low economic growth, volatile capital markets, ultra-low interest rates and an ageing population. Against this background, gold has a clear role to play within investment portfolios and institutional interest is rising steadily, as Osamu Hoshi, Executive Officer at leading Japanese trust bank Mitsubishi UFJ Trust and Banking Corporation explains.

In July 2010, MUTB launched its gold exchange-traded fund (ETF) on the Tokyo Stock Exchange. Backed by gold bullion, ‘Fruit of Gold’ was principally of interest to individual investors in the early years. But institutional demand gradually picked up, and as of January 2016, investment in the ETF was split almost equally between individuals and institutions.

The real change occurred in the second half of 2015 when financial institutions began to adopt a different attitude towards gold. Until then, institutional interest had been fairly muted in Japan. But, as global financial markets became increasingly volatile, gold’s appeal increased. Several factors lay behind this shift. First, the gold price was relatively stable compared to stock and currency markets. Second, gold has a historically low correlation with conventional investment assets. And third, the US dollar/Japanese yen exchange rate is inversely correlated to the US dollar-denominated gold price, so there is less fluctuation in yen-denominated gold prices than dollar prices.

As one financial institution in Japan explained: “With global interest rates at historically low levels, our concerns about gold as a non-yielding asset have receded. At the same time, we are naturally drawn to the comparatively stable performance of gold, given the fluctuations in financial markets.”

Chart_-_Assets_Under_Management_Fruit_Of_Gold

Chart: Assets under management of “Fruit of Gold,” 7/2/2010 – 9/15/2016. Source: Mitsubishi UFJ Trust

Pension contribution

Gold’s appeal in the current economic and monetary climate has spread to pension funds too. The yellow metal is playing an increasing part in defined benefit (DB) and defined contribution (DC) pension plans.

In the corporate pension sector, more than 200 DB pension funds have invested in the ‘Fruit of Gold’ ETF through a commingled fund or in balanced funds that include gold. Interest has been rising steadily, and demand is widely expected to increase.

In the DC sector, more than 160 companies have added the MUTB Fine Gold fund (which mostly invests in the ‘Fruit of Gold’ ETF) to their lists of available investments to investors. While this is small in terms of absolute scale, the fund has been growing fast. Two years ago, it amounted to about ¥600 million (approx.US$6 million). Now it has almost tripled to over 1.9 billion JPY, graphic evidence of gold’s growing appeal.

The surge in demand is particularly notable, given the way in which Japanese DC pensions operate. In corporate DC plans, sponsors determine the range of available products and beneficiaries make their own individual selections from this line-up. Under individual DC plans, savers can select investment products directly, provided they are offered by the financial institutions behind the scheme.

Increasing investment

One financial institution alone, which introduced the Fine Gold product for individual DC plans in April, accumulated ¥200 million (approx. US$2 million) of investment money in just four months, underlining gold’s growing acceptance as a savings and wealth accumulation tool.

Looking ahead, further investment in gold is widely expected. Almost 5.75 million people were enrolled in DC pensions in Japan at the end of March 2016, a number that will almost invariably increase over the next five to ten years.

On the institutional front too, asset managers increasingly recognize that gold offers clear diversification benefits as part of a balanced investment portfolio. This is likely to drive demand for a range of gold investment products, including our gold-backed ETF.

In essence, the perception of gold is changing among Japanese investors, driven by a growing appreciation of gold’s contribution to portfolio diversification, wealth protection and risk management. Looking ahead, awareness of and interest in gold is expected to increase steadily across the investment community.

Article first appeared in Gold Investor (vol. 2, Nov 2016), published by World Gold Council.

Disclaimer. The views and opinions expressed in this blog are those of the authors and do not necessarily reflect the official policy or position of Orbex.

 

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