Japan buyers rush to snap up gold as tax rise looms

March 27, 2014 9:50 am

Japan buyers rush to snap up gold as tax rise looms

By Ben McLannahan in Tokyo

A landmark increase in Japan’s sales tax has led to a rush for small gold bars as retail investors pile into the precious metal to avoid next week’s rate rise.

Tanaka Kikinzoku Jewelry, a precious metals specialist, reported that sales of gold ingots across seven of its shops are up more than 500 per cent this month, as customers rush to take advantage of the current 5 per cent rate of consumption tax before it rises to 8 per cent on 1 April.

At the company’s flagship store in Ginza on Thursday, people queued for up to three hours to buy 500g bars worth about Y2.3m ($22,500). March has been the busiest month in Tanaka’s 120-year history.

Prime Minister Shinzo Abe has embarked on a series of radical reforms dubbed Abenomics in an attempt to weaken the yen and boost the ailing Japanese economy, prompting investors to buy gold as a hedge against the spectre of higher inflation.

Investors are being drawn to the metal not just because of higher taxes, said Itsuo Toshima, an adviser to pension funds.“Slowly and steadily, people are preparing for the worst, which is the failure of Abenomics.”

“To protect the value of wealth, gold comes into play as an inflation hedge, and if the economy goes back to deflationary circumstances then, again, money seeking safe havens would flow into gold.”

Economists are divided on whether Abenomics can survive a rise in the deeply unpopular sales tax, which is being increased to help stabilise Japan’s huge public debt. Last time a Japanese government tried to hike the levy in 1997, a deep recession followed.

Japan’s hunger for gold bars is at odds with general sentiment towards the precious metal, the price of which fell 28 per cent last year, bring an end to a 12 year bull run. Yet Yuichi “Bruce” Ikemizu, head of commodities trading at Standard Bank in Tokyo, said retail buyers had been tempted into purchases by lower prices.

The Fruit of Gold ETF managed by Mitsubishi UFJ Trust and Banking, the country’s most popular bullion-backed investment vehicle, saw its assets rise from 5.6 tonnes, when Mr Abe assumed power in December 2012, to 6.9 tonnes now – even as the US dollar price of gold fell by more than a fifth over that period.

Individual investors in the fund numbered 15,243 in mid-January, a sharp increase from 9,849 a year earlier, said general manager Osamu Hoshi.

At Tanaka’s third-floor store in Ginza, one 33-year trader at a foreign-owned brokerage, who did not want to be named, said the tax increase represented a “good opportunity” to buy more gold as he was worried about holding too many yen-denominated assets.

“I plan to hold it for a long time until there is a good time to sell when the yen collapses or something,” he said.

Even a strong rise in Japanese gold purchases is unlikely to affect the global bullion market. Last year consumer demand in Japan was 21.3 tonnes, according to the World Gold Council, compared to 1,066 tonnes in China and 975 tonnes in India.