New decade, renewed challenges
As the new decade begins, Japan faces an expanding list of macroeconomic challenges that are both old and new. Among these:
- An exceptionally high level of public debt at 238% of GDP, will limit future economic growth and reduce the potential for savings and investments
- Unfavourable demographics also hinder the government’s ability to finance increasing social security expenditures
- Ultralow and negative interest rates have pushed investors to seek risk assets at elevated valuation levels
- Continued financial market uncertainty, ranging from geopolitical tensions to expectations of diverging global economic growth and an increase in asset volatility.
Given the macroeconomic challenges confronting the Japanese economy and the aggressive monetary easing that has taken place under the Abe administration, the Japanese Yen has fallen 23% against the US dollar since the start of 2013. For Japanese investors, we believe that gold is not only a useful long-term strategic component for portfolios, but one that is increasingly relevant in the current environment (see 2020 Gold Outlook).
The increased relevance of gold
Institutional investors have embraced alternatives to traditional stocks and bonds in pursuit of diversification and higher risk-adjusted returns. The share of non-traditional assets among global pension funds increased from 7% in 1998 to 23% in 2019 2 (Chart 1). This number increased to 11% in Japan from 7% a decade earlier.
Gold allocations have been recipients of this shift. Gold is increasingly recognised as a mainstream investment, evidenced by the growth in global investment demand – an average of 14% per year since 2001 – and by an almost four-fold increase in the gold price over the same period.3