Gold Lures Japan’s Pension Funds as Abe Targets Inflation

by on January 8, 2013 7:44 am GMT

Japanese pension funds, the world’s second-largest pool of retirement assets after the U.S., will more than double their gold holdings in the next two years as the government seeks to target inflation to bolster economic growth, according to an adviser to the funds.

Assets held by Japanese pension funds in gold-backed exchange-traded products may expand to 100 billion yen ($1.1 billion) by 2015 from less than 45 billion yen at present, said Itsuo Toshima, who represented the Tokyo office of World Gold Council for 23 years through 2011.

New Prime Minister Shinzo Abe’s pledge to spur inflation to 2 percent and end the yen’s appreciation means Japanese pension funds now have to hedge against rising prices and a currency decline after two decades of stagnation. They’re set to jump into gold after 12 straight years of gains with the precious metal now 14 percent below its all-time high reached 2011. Gold priced in yen reached a record a week ago.

“Bullion’s role as an inflation hedge, long ignored by Japanese fund operators, has come under the spotlight thanks to Abe’s economic policy,” Toshima, who now works as an adviser to pension-fund operators, said in an interview today in Tokyo. “Gold may be a standard asset-class in the portfolio of Japanese pension funds as Abe’s target is realized.”

Pension Funds

Japanese pensions oversee $3.36 trillion, according to human-resource and consulting services company Towers Watson & Co. Corporate pension funds in Japan will diversify 72 trillion yen in assets after domestic stocks produced little return in the past two decades, according to Daiwa Institute of Research.

Japan’s Nikkei-225 (NKY) Stock Average lost 73 percent at the end of 2012 from a record high reached in December 1989, compared with the MSCI All-Country World Index (MXWD), which more than doubled.

The nation’s economy has been mired in deflation, with consumer prices kept below 3 percent since 1991, as the bursting of an asset bubble in the late 1980s led to stagnant economic growth as land values dropped to about half of what they were.

Bullion posted its longest run of annual gains in at least nine decades last year. Credit Suisse Group AG said Jan. 3 gold will average the most ever this year and joined Goldman Sachs Group Inc. in predicting the 12-year bull market will probably peak in 2013.

Gold in Yen

Mitsubishi UFJ Trust and Banking Corp., which introduced Japan’s first gold ETF in 2010, expects assets held in the product to double over the next several years from 26.2 billion yen as of Nov. 30. Global investors are holding a near-record amount in gold-backed ETPs that are valued at $139.6 billion, data compiled by Bloomberg show.

Local pension funds last year for the first time allocated 2.1 billion yen, or 2 to 3 percent of their assets, in the gold- backed ETF of Mitsubishi UFJ Trust, a member of Mitsubishi UFJ Financial Group Inc. (8306), Japan’s largest lender, according to general manager Osamu Hoshi. The bank is in talks with several pension funds on gold, he said Dec. 20.

Gold rose 70 percent as the Fed bought $2.3 trillion of debt in two rounds of monetary easing from December 2008 through June 2011. The European Central Bank, Bank of Japan and China have all pledged to do more to bolster their economies.

Gold in Japan’s currency reached a record 147,780 yen an ounce on Jan. 2, after climbing 21 percent last year. Gold in dollars reached a record $1,921.15 an ounce on Sept. 6, 2011 and gained 7 percent in 2012.

Federal Reserve

The metal fell last week for a sixth week, the worst run since May 2004, after U.S. Federal Reserve policy makers said they’ll probably end their $85 billion of monthly bond purchases this year, according to the record of the Federal Open Market Committee’s Dec. 11-12 gathering. Bullion traded at $1,648.59 at 3:49 p.m. in Tokyo.

Turnover at Mitsubishi UFJ Trust’s gold ETF on the Tokyo Stock Exchange amounted to 8.67 billion yen in November, exceeding turnover in the SPDR, the biggest exchange-traded fund backed by bullion, and becoming the ninth most-traded fund out of the 140 products listed on the Japanese securities exchanges, data compiled by the bank show.

Mitsubishi UFJ’s ETF is linked to yen-based gold prices on the Tokyo Commodity Exchange, Japan’s largest raw-material bourse. Gold futures on the exchange known as Tocom rallied 19 percent last year, outperforming the 7.1 percent increase in the spot market in London, as the yen declined 13 percent against the dollar.

Assets held by corporate pension funds in Japan amounted to 72.24 trillion yen as of March 2012, declining 0.9 percent from a year earlier, according to Yasuo Sugeno, director at Daiwa Institute of Research in Tokyo. Of the total, about 72 billion yen were allocated to commodities including gold through hedge funds, he said Dec. 10.

Government Pension Investment Fund of Japan, the operator of the world’s largest pension fund with 113.6 trillion yen, stays away from commodity investment as 67 percent of their assets were allocated to Japanese bonds, Sugeno said.

“Pension money invested in bullion is ‘peanuts’ at the moment,” Toshima said. “If 1 percent of their total assets shift to the metal, the gold market would explode.”