Gold Profits in Japan Seen in Abe Mulling Higher Tax

Japanese gold retailers are preparing for an acceleration in consumer purchases in the next six months if a planned sales-tax increase is carried out as part of the government’s policy to end deflation.

Prime Minister Shinzo Abe will decide whether he will go ahead with a plan to raise the tax to 8 percent in April from 5 percent after analyzing business confidence data from the Bank of Japan on Oct. 1. Assuming the dollar-denominated gold price is unchanged and the dollar-yen exchange rate remains the same, investors would profit as much as 3 percent from purchasing bullion on March 31 and selling it back on April 1, according to broker Fujitomi Co.

Japanese consumers are reviving their interest in gold as Abe’s policy of ending deflation through unprecedented monetary stimulus weakened the yen 13 percent against the dollar this year, highlighting the role of bullion as a hedge against currency depreciation and inflation. Japan’s gold imports more than tripled to 14.2 metric tons in the seven months through July 31 from a year earlier, government data showed.

“We may experience a gold boom similar to what happened in 1997, the last time the Japanese government increased the levy,” Masahiro Arai, general manager at Tokyo-based bullion house Tokuriki Honten Co., said in an interview yesterday.

Japan boosted the tax to 5 percent in April 1997 from 3 percent, the first increase since the nation introduced the duty in 1989. Demand for gold from Japanese investors more than doubled to 24 tons in the first quarter of 1997 from 9 tons in the previous three months, according to the World Gold Council.

1997 Increase

Japanese investment in gold bars and coins more than doubled to 4.5 tons last quarter from 2.1 tons a year earlier, WGC data showed. Demand increased as a slump in the international market made bullion more affordable to investors while Abe’s economic policy boosts expectations for inflation. Japan’s consumer prices increased in July at the fastest pace since 2008, signaling progress in Abe’s goal of pulling the Japanese economy out of 15 years of deflation.

Gold traded at $1,301.74 an ounce at 3:38 p.m. Tokyo time after slumping to $1,180.50 on June 28, the lowest level since August 2010. It is headed for the first annual drop in 13 years as some investors lost faith in the metal as a store of value, and as the U.S. economy improved and stocks and the dollar rallied. Goldman Sachs Group Inc. predicted on Sept. 13 that bullion may drop below $1,000 as the U.S. Federal Reserve withdraws stimulus.

Trading Boost

The prospect of a sales-tax increase may also boost trading on the Tokyo Commodity Exchange, with investors buying gold for February delivery and selling the metal for April delivery, according to research company JSC Corp. in Tokyo.

“The activity has boosted the price of February-delivery gold above that of April-delivery futures, creating an unusual backwardation in the market,” said JSC analyst Takaki Shigemoto.

The volume of gold trading on the bourse, known as Tocom, expanded 27 percent to 9.5 million contracts in the eight months through Aug. 31 from a year earlier. Abe’s economic policy weakened the yen and boosted yen-denominated gold prices, attracting investors to the market, Shigemoto said. Gold futures on Tocom climbed to a record 5,081 yen a gram ($1,592 an ounce) on Feb. 7 and closed at 4,165 yen today.

The sales tax is set to rise to 8 percent in April then increase to 10 percent in October 2015, pending a final decision by Abe. Economy Minister Akira Amari said on Sept. 13 that corporate-tax reduction is an option as part of a planned package to reduce the economic blow from raising the sales tax.

Japanese Confidence

Delaying an increase in the sales tax could undermine confidence in Japan’s fiscal sustainability and lead to higher government bond yields, BOJ Governor Haruhiko Kuroda said on Sept 5.

Japanese shares could plunge 10 percent or more if Abe fails to carry through on a plan to raise the sales tax, according to JPMorgan Chase & Co. economist Masamichi Adachi and UBS AG economist Daiju Aoki. Postponing an increase would have a large and negative impact on Japan’s financial markets, said 22 of 32 economists in a Bloomberg News survey.

“A rout in the bond and currency markets could boost Japanese demand for gold as a haven,” said Naomi Suzuki, an economist at the Sumitomo Shoji Research Institute in Tokyo.

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