As weakness in the yen looks set to continue into next year, prospects for gold priced in the Japanese currency have rarely looked so good.

Japanese investors with exposure to yen—denominated bullion have earned themselves healthy returns so far this year, with domestic prices for the precious metal now hovering around a record high of 10,000 yen per gram — up around 18% since January.

The gains are mainly being fueled by the collapse in the yen, according to Toshitaka Tazawa, commodities analyst at Fujitomi Securities Co. The currency is trading near multi-decade lows, and has fallen against all of its Group-of-10 counterparts this year. That offers a strong case for Japanese investors to hold — rather than sell — the precious metal, which should benefit from strength in the dollar-yen rate as the international benchmark is usually quoted in the greenback.

“Retail customers tend to buy on the dip and they sell when it goes higher,” said Taketomo Washida, director at Japanese precious metals refinery Tokuriki Honten Ltd. “But they are not selling that much now.”

To be sure, ongoing weakness in the yen is not necessarily a foregone conclusion. On Monday, the Bank of Japan hinted at potentially ending its loose monetary policy stance, which has been key in driving the currency’s downward trajectory as the Federal Reserve and other central banks have hiked rates aggressively.

Yet gold still remains a viable option for investors in Japan facing expensive stocks, after the benchmark market notched a three-decade high in August. Questions are also emerging over how sustainable the share rally may prove, with companies coming under increasing pressure to raise their market value as the collapse of the yen may no longer provide such a big tailwind for the nation’s exporters.

“I’m glad to see that the valuation of the asset has been going up,” said Kotaro Mori, who for the past two years has been putting money into a gold-accumulation plan — a popular method of getting exposure to the precious metal in Japan. The Tokyo-based doctor, who usually dabbles in stock markets, added that he “would like to continue investing in gold. I think it makes sense to have some heterogeneous assets.”

Japanese investors have also shown a strong interest in bullion-backed exchange-traded funds since the pandemic upended the world economy, with holdings seeing strong growth from 2020. That’s in stark contrast to the global aggregate, with total holdings suffering steep outflows as investors continue to shun the precious metal on concerns that the Fed will keep rates higher-for-longer to quell stubborn inflation. Higher borrowing costs are typically negative for bullion, which doesn’t yield interest.

Masashi Murata, president and CEO of Osaka Dojima Exchange Inc., said speculation that the Fed will deploy additional hikes is easing, further boosting the allure of gold.

“You may think gold is strong under risk averse conditions, but in Japan, especially among retail investors, they move funds from their savings to gold and stocks among others, using them as one of investment tool,” Murata said.

Prices will probably remain high depending on the combination of the speed of dollar-yen’s decline, as well as demand under a potential US rate cut scenario, according to Fujitomi Securities’ Tazawa.

Spot gold priced in the US dollar slipped 0.1% to $1,920.68 an ounce as of 10:37 a.m. in Tokyo.

--With assistance from Yumi Teso.

Author: Sybilla Gross, Marika Katanuma and Eddie Spence