Penny Interest1000 Dollars*

March 14, 2002

Some Japanese Are Hoarding Gold

By JAMES BROOKE

OKYO, March 13 — While Japan has had the world's fastest- growing major stock market this year and the yen has jumped nearly 3 percent against the dollar in the last month, a small but growing number of Japanese investors are preparing for the worst and hoarding gold.

With limits looming on bank deposit insurance, banks tottering under bad debts and the government printing money in an effort to create inflation, sales of gold are expected to come close to quadrupling this quarter, compared with the period last year, according to the World Gold Council, an industry group.

"The Japanese economy is very bad," Yujiro Isoda, a 67-year-old retiree, said after he had purchased two Austrian gold schillings at a downtown gold shop here. "The accumulated bad loans are still not cleared. How can I protect my property? Buy gold, that's what I thought."

Nearby, the shop manager hovered over a display counter where gold bars were arrayed like metal pats of butter. In February, he said, his gold sales were seven times those in February last year.

Below Japan's Zenlike surface calm, a big fish is roiling the lower depths: consumer unease about the direction of the yen, the economy and the banks.

On April 1, federal insurance on time deposits, currently unlimited, is to be restricted to $75,000 for each account; that cap will be extended to all savings accounts in April 2003. At the same time, stocks of some major banks bump along at penny-stock levels because investors know that several are effectively insolvent without another multibillion-dollar bailout from the government.

On the government side, public debt has ballooned to 140 percent of gross domestic product, the highest level of any major developed economy. Now politicians and economists are pressing the Bank of Japan to print trillions of yen to allow Japan to inflate its way out of its debts. From September through February, the markets responded, devaluing the yen by 15 percent against the dollar. This month, the yen has strengthened as Japanese companies have repatriated assets to close their books for the end of the fiscal year, March 31.

But Mr. Isoda's generation acutely remembers the trauma of Japan's postwar inflation, which peaked at 115 percent in 1947.

"I have experienced World War II and survived the postwar high inflation," he said. "I know that paper money can turn into rubbish, nothing. But gold can survive any time of history."

While some may dismiss Mr. Isoda's economic views as ultraconservative, they were generally endorsed the same afternoon last week in an executive dining room at the Bank of Japan, the nation's central bank.

"There is a gold rush going on," said a high official at the bank, which is responsible for controlling the nation's money supply. "People are buying lots of gold. There is uncertainty about the banks, about deflation and, finally, about inflation. Gold is seen as the best hedge against inflation."

Some investors, particularly younger people, are also shifting into dollars and euros, he added, in part because they did not experience Japan's roller coaster of exchange rates over the last 15 years. That shift is still relatively small, but Japan's bank savings are so big — 716 trillion yen, about $5.6 trillion — that American companies say even a tiny shift would mean a lot of business. Last year, Pimco, an American fund management company, said its Japanese accounts had increased about 90 percent, to $6 billion — an increase that Pimco said it hoped to match this year.

Since last November, the surge in Japanese gold sales has contributed to a 10 percent strengthening in world gold prices. Measured in yen terms, the jump was 18 percent. In Tokyo, the trend is most pronounced at the store visited by Mr. Isoda, where clerks have sometimes helped patrons load as much as 85 pounds of gold bullion — more than $300,000 worth — into shopping bags and lug the bags down the street to their cars.

"We don't know how they keep their gold at home," said Osamu Ikeda, a spokesman for the store's parent company, Tanaka Kikinzoku Kogyo. "Maybe in a safe, maybe in a bank safe deposit box."

In the last quarter of 2001, sales of investment gold — bars and coins, as opposed to jewelry or ingots used for industrial processes — hit 690,000 troy ounces in Japan, a 54 percent jump over the period in 2000. Itsuo Toshima, regional director for Japan and Korea at the World Gold Council, forecast that sales of bars and coins would jump to 1.45 million ounces in the first three months of this year, almost four times the level of the period last year.

"It is increasing very rapidly," Mr. Toshima said.

Japan's interest in gold reverses a long trend. Gold spiked as high as $850 a troy ounce in 1980, when the second Arab oil embargo sent inflation roaring and the Soviet invasion of Afghanistan caused stock markets to slump. But after those problems receded, investors around the world lost interest in gold because inflation was tamed and stock markets generated consistent gains. Gold now sells for about one-third that 1980 high — $293.60 an ounce in New York yesterday.

But with uncertainty clouding the Japanese economy, some investors see gold as a rock to cling to. Since a speculative bubble burst in 1989, stock and land prices have receded to about one-quarter of their peaks.

The most popular alternative — bank savings, which account for half of Japan's $10.5 trillion in financial assets — lost much of their appeal as interest rates shrank, recently to as little as 0.02 percent a year. On Monday, Shizuoka Bank said it would cut its interest rate for ordinary savings accounts to 0.001 percent from 0.005 percent; that move means that savers will get 1 cent in interest annually for each $1,000 on deposit.

But now the trade-off between ultralow interest and security is being shaken by the restrictions on deposit insurance and by a growing perception that some banks are insolvent. In the last year, about 50 small banks and credit unions have failed.

With the deposit insurance deadline looming, 21 percent of all time- deposit accounts over $75,000 were closed last year. Most of the money, about $200 billion, was moved into protected savings accounts, according to the Bank of Japan. Fear about the safety of banks now outweighs concern about fluctuations in the price of gold for many Japanese.

"Our customers don't care much about the gold price," said Yoshihiro Matsumoto, director of the gold section of Mitsubishi (news/quote) Material. "They just want to convert their bank account into gold."

Even if they do not bother buying and storing gold, some Japanese are still shying away from conventional savings. Bank managers sourly admit that some depositors have closed savings accounts, only to turn around and place the cash in safe deposit boxes at the same banks — or hide it at their homes.

James Terada, an American business consultant, remembers a visit he made last summer to an old classmate from his Tokyo elementary- school days: "He asked, in all seriousness, that if you stored yen bills in a jar, sealed it with wax, would the currency get moldy and spoil?" Mr. Terada said.

In a regional consumer confidence poll released last month by MasterCard International, the Japanese ranked as Asia's biggest pessimists.

Other nonpaper assets won favor in Japan this winter. At the downtown Tokyo branch of Mitsukoshi, one of the city's largest stores, jewelry sales rose 27 percent in January compared with last year, while sales of art objects rose 13 percent.

Overseas, Japan's new love affair has not gone unnoticed.

"The Japanese want something physical to put their money in," Paul Macarounis, a gold trader for NM Rothschild Australia said from Sydney. He discounted this week's run- up of the yen and Tokyo stock prices, saying Japan remained economically weak. "The reasons for buying gold are not going to go away in a hurry."

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