The Japanese Are Dumping Their Gold

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In Japan, people who are old enough to have lived it as adults still reminisce about the bubble that blew up in 1989 when the Nikkei almost hit 40,000 (now at 9,045) and when the sky-high prices of real estate could only go up further. The slide from the top to reality today has been brutal, and a lot of people lost their shirts. A home changed from being an “investment” to being an “expense.” Stocks became toys for traders. And government bonds, because they kept their value though their coupons were practically imperceptible, became the place to go, and by golly, there suddenly were a lot of them, a veritable tsunami of JGBs that is still building momentum and will reach by the end of this fiscal year one quadrillion yen ($14 trillion), 240% of GDP.

But there has been one investment, especially since 1999, that has worked out phenomenally well for the otherwise hapless Japanese investor: gold.

Alas, they’re dumping it. And when they’re dumping it faster than internal demand can absorb it, the surplus is exported and shows up in the trade statistics of the Ministry of Finance: in fiscal 2006, Japan became a net exporter of gold for the first time since the ministry started tracking it in 1988. Net exports rose every year and built into a crescendo in fiscal 2011, ended March 31, when they surged to 135 tons, an astounding 61% jump from fiscal 2010.

The two largest destinations were Britain and Hong Kong, according to the Ministry of Finance trade data. While Japan has a long history of gold mining, current production is small, ranging from 6.8 tons to 8.9 tons annually over the last decade—hence only a negligible factor in the phenomenon of net exports.

The main sellers were individuals. And one wonders why the love affair with physical gold, one of the few profitable investments the Japanese had access to, is ending despite its truly great run since 1999, when it traded at ¥1,000 per gram, to its peak in August 2011 when it traded at ¥4,745 per gram—the month that bullion house Tanaka Kikinzoku Kogyo K.K. said it bought 15 tons of gold from individuals, five times the normal rate.

There may be reasons that are unique to Japan. Worldwide, the run-up in gold prices might have encouraged individuals to sell their physical gold at an ever quicker pace, but that has not taken place on a massive scale. Rather, a highly plausible reason is that inflation and the fear of inflation have been wrung out of the Japanese psyche over the last 15 years, a period that pundits describe as an infernal descent down the “deflationary spiral”:


As the graph shows, the Japanese were in fact among the few people in the world enjoying actual price stability, with interchanging periods of minor inflation and minor deflation—as opposed to the 27% inflation per decade that the Fed has conjured up and continues to call, moronically, “price stability.”

The lack of inflation in Japan has much to do with how expensive everything in Japan used to be during the bubble when Japan was an essentially closed-off market. Over the years, under heavy and consistent pressure from the US, Japan cracked open its borders just a smidgen here and there, allowing cheaper imports to appear, gradually and grudgingly, on the shelves. Read…. The Real Reason for Deflation in Japan.

So, gold has been a great investment, but the Japanese no longer see the need to protect their assets against inflation as its ravages have receded into distant memory. With that fear gone, the motivation to hold on to an asset that has had a phenomenal run turns into the irresistible urge to take profits. But there may be another reason:

“Historically, gold flowed to wealthy countries,” said Itsuo Toshima, former Japanese representative at the World Gold Council. And a massive gold outflow, he said, is a sign of Japan’s “declining economic power.”

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  16 comments for “The Japanese Are Dumping Their Gold

  1. Ed_B
    May 10, 2012 at 6:01 am

    "So, gold has been a great investment, but the Japanese no longer see the need to protect their assets against inflation as its ravages have receded into distant memory. With that fear gone, the motivation to hold on to an asset that has had a phenomenal run turns into the irresistible urge to take profits."

    This seems a stretch to me. Consider that Japan had 2 absolutely unmitigated disasters last year and is verging on yet another one with the crumbling Fukushima nuclear power plant. It seems to me that because of the earthquake and tsunami in that country in 2011, massive amounts of money are needed to dig out and rebuild significant parts of the country. While government may well provide some of this, individuals and businesses will likely supply the bulk of it. What then should someone sell to rebuild or replace a damaged home or business? Equities that have not advanced in price for years or gold that has been wildly profitable? Unless one sells a profitable investment, there is no profit to enjoy. It remains unrealized on paper unless it is sold. Selling gold may very well be the only way that many Japanese can raise the money they so desperately need.

  2. Lee
    May 10, 2012 at 7:05 am

    Maybe the people are selling gold because:

    1. People take profits on assets that have increased in price

    2. People are doing it tough with falling income, increasing costs, and other asset prices falling as well

    The movement in the Yen versus the Dollar is unreal and the Yen is wildly over valued. IMO the value of the Yen right now should be around the 100 yen per US dollar level and based on the poor economic situation in Japan the real value would be about 125 yen per US dollar or more.

  3. evilintheeast
    May 10, 2012 at 8:19 am

    I stay in Japan and what I have seen is cash for gold places pop up everywhere over the last few years.
    many people did dump their gold. but i am betting there is a lot more here. the economy has slowed down a lot and the Japanese are printing like mad here, and soon the taxes will go up I believe to 15% for sales tax it is now 5%. so the worst is yet to come. deflation is the mind set here when i talk of inflation people either look at me like whats that? or laugh. I hope Im not on the wrong boat cause I have been buying for the last few years.and everyone else is selling.

  4. Wolf Richter
    May 10, 2012 at 2:00 pm

    evilintheeast – timing is everything, and unfortunately, we'll know only afterwards if we got it right.

    Lee – I'm with you. I would like to add that Japanese individuals and institutions hold 95% of the $14 trillion in JGBs, and they also have trillions in the bank. So, they're wealthy, if JGBs and bank deposits retain their value. It's the government that's utterly impoverished and indebted, and so the question remains open as to how long JGBs can retain their value….

  5. Mike
    May 11, 2012 at 10:51 pm

    Individuals only ever sell hard assets for one reason: they need the cash. I deal with hard assets as part of my job and people really only make this choice when they are backed into a corner with a knife to their throat (and even then…).

    Japan is finally hitting the wall. The predictions (decades old) of Japan running into trouble are coming true. There is no more free cash to give to the government anymore – old Japanese citizens are selling their bonds to pay for expenses. This is likely to work out OK in a relative sense for Japan because they owe the debt to their own citizens but it will still suck for those who have saved for their retirement. The odds that they will be asked to "sacrifice" for their nation is 100%.

  6. Wolf Richter
    May 12, 2012 at 4:17 pm

    Mike – Yup, you nailed it! For more detail, check out my posts under the tab "Japan's Juggle" … incl. the "Endgame' series.

  7. I1
    May 13, 2012 at 4:24 pm

    According to Japan Ministry of Finance data, imports of gold coins and monetary gold exceeded exports by a factor of 466% in Japan for the fiscal year 2011.

  8. JapanFan
    May 14, 2012 at 7:09 am

    The Japanese are quite susceptible to following the crowd. Last year as gold soared, the press began talking about money to be made selling gold. Lo and behold, Japanese housewives began lining up to sell gold. We have several friends here who did so. When asked why they did this, with no perceptible change in their family financial situation, they simply claimed that everyone was talking about it and it seemed the "thing to do." This is similar to what happened here with home stock trading by housewives in the run up to the "Lehman Shock" as they call the 2008 financial crisis here. Mass media ran features profiling housewives making money doing this and it became a self-fulfilling prophecy. It was amusing that a couple of my male employees only learned much later of the losses incurred by their day trading spouses, as the wife often controls all the household finances.

  9. Wolf Richter
    May 14, 2012 at 1:45 pm

    JapanFan – Thanks. I've heard similar stories about housewives selling gold. They're trying to do the right thing (buy low, sell high) — though we won't until afterwards if they got the timing right, or if they screwed up once again. But I never thought it would be on such a scale. Of course, we don't know how much gold they actually own, and what percentage they sold. That would be an interesting statistic to have.

  10. Lee
    May 16, 2012 at 10:42 pm

    What does one make of this:

    From Harvey Organ's commentary:

    "……..but more importantly as of hours ago, in a truly historic move, "Okayama Metal & Machinery has become the first Japanese pension fund to make public purchases of gold, in a sign of dwindling faith in paper currencies." Not our words: the FT's.


    Initially, the fund aims to keep about 1.5 per cent of its total assets of Y40bn ($500m) in bullion-backed exchange traded funds, according to chief investment officer Yoshisuke Kiguchi, who said he was diversifying into gold to "escape sovereign risk".

    The move into a non-yielding asset comes as funds in the world’s second-biggest pension market are under increasing pressure to meet promised payments, as domestic interest rates remain rooted near zero. This year, the first of Japan’s baby boomers turn 65, becoming eligible for payouts.

    Mr Kiguchi said the lack of yield was a concern for the fund’s investment committee, but he persuaded them that "from a very long-term point of view, gold may be one of the safe currencies". He added that he had sold Australian dollars this month to meet his initial target allocation for gold for the fund, which has 20,000 members.

    Mizuho Trust & Banking, a unit of Mizuho Financial Group, has begun to offer investment schemes allowing smaller pension funds to invest in gold.

    While few fund managers are counting on a crash in core assets such as Japanese government bonds, said Takahiro Morita, head of the Tokyo arm of the World Gold Council, a producers’ association, they were increasingly receptive to the idea that gold could act as a buffer against shocks. "Last year’s tsunami and the eurozone debt crisis shows that it was wise to expect the unexpected," he said.

    The first of many:

    Historically, institutions in the $3.4tn Japanese pension market have clung to traditional assets. Bonds accounted for 59 per cent of industry assets in 2011, the highest share in the world, according to Towers Watson, a consultant. Just 6 per cent – the lowest share – was invested in alternatives such as property, private equity and hedge funds.

    Nomura, Japan’s biggest wealth manager, added a gold option to its monthly survey of 1,000 randomly selected retail investors in February. Every month since, gold has been ranked the third-most desirable addition to portfolios, well ahead of competing assets such as investment trusts, bonds or foreign securities.

    And the absolute punchline:

    With institutions warming to gold, too, demand could grow further. "If you look at assets over the past couple of decades, equity has been a loser, while fixed income offers tiny coupons," said Yoshio Kuno, Japan head of Newedge, the futures broker. "Gold is becoming an acceptable currency substitute."

  11. Wolf Richter
    May 17, 2012 at 2:43 pm

    Lee – Conflicting info. How fun!

    Much has been written about that J-pension fund adding gold to its portfolio. Everyone is worried about JGBs and the yen (though they've been extremely strong), and they're grappling with other options. I can see the pension fund's logic. If the yen or JGBs suddenly collapsed (very unlikely), this bet would be a huge plus. If not, well….

  12. Jam Akin
    August 31, 2012 at 12:53 am

    I have a friend in Japan who was visited by Yakuza in her apartment late last year. They are preying on people, intimidating the women and elderly into selling their gold at very low prices – door to door.

  13. Wolf Richter
    August 31, 2012 at 1:17 am

    Jam – what an incredible story! I would love to get more data on this type of operation. Are you in Japan right now?

  14. judy
    November 29, 2012 at 10:54 am

    Selling gold enables an average consumer to consume more while maintaining an interest earning liquid cash asset for contingencies.

    Buying and storing gold is a luxury for those who don't need cash anytime soon.

  15. Jam Akin
    December 6, 2012 at 3:17 am

    Apologies that I missed your comment earlier Wolf. I travel to Japan on business from time to time. My friend was living in Kyoto at the time. A man came to her apt door asking about interest in selling gold. She made a mistake and showed him a genuine 1oz gold coin. He would not leave and called for backup – she is fairly savvy and ID'd them as Yakuza. She negotiated the best price she could – about 20% below spot price at the time – and sold the coin to them just to get them to leave her place without further incident.

  16. Wolf Richter
    December 6, 2012 at 7:06 am

    Jam – amazing! Thanks for sharing the story.

Comments are closed.