Gold Investment "Offers Escape" for Japan Pension Fund

A SMALL PENSION FUND has become the first in Japan to state openly that it is using Gold Investment to "escape sovereign risk" in the government bond market.

Okayama Metal & Machinery has switched some 1.5% of its ¥40billion assets ($500m) to a Gold Investment via exchange traded funds, the Financial Times quotes Yoshisuke Kiguchi, chief investment officer at the fund.

Gold's lack of yield or interest payments is "a concern" for his committee, said Kiguchi, but "from a very long-term point of view, gold may be one of the safe currencies."

Japan's government debt now stands above ¥700 trillion ($8.7 trillion), with domestic banks, pension funds and life insurance companies holding almost 78% by value, according to the Ministry of Finance in Tokyo.

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

Analysis by consultancy Towers Watson says that in 2011, fixed-income bonds – which are potentially exposed to inflation and default by the borrower – accounted for 59% of the Japanese pension industry's ¥273 trillion ($3.4trn) in assets.

A growing number of European and North American pension funds are also choosing Gold Investment to hedge their exposure to inflation and bond default. Dutch glass-workers union SPVG won a court case in March 2012, arguing that its regulator – the Netherlands Central Bank – had been wrong to order it to reduce the fund's 13% allocation to Gold Investment.

SPVG is now pursuing the central bank for damages of €10-11 million, resulting from the potential gains lost to the fund by reducing its gold position in early 2011.

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