Gold vs. Yen: XAU/JPY

The Japanese yen is one of the most fascinating currencies in the world, given that it is the currency of the world’s third largest economy and is regarded as a safe haven currency.

Despite the yen’s save-haven status, the Japanese economy has been plagued by chronic deflation. This deflation has largely been the result of the country’s demographic problem: an aging population with a very low reproductive rate. As a result, a large percentage of the nation’s resources are devoted to caring for a segment of the population that is no longer economically productive. The relatively small younger workforce only compounds the problem.

2000 Japan Yen note.

To combat the deflation that is perceived to be harmful for the economy, under Japanese Prime Minister Shinzo Abe and Bank of Japan Governor Haruhiko Kuroda the country has since 2013 embarked on a massive quantitative easing (QE) experiment the likes of which have never before been seen. Currently, the Bank of Japan is buying about 80 trillion yen of securities each month to stimulate the economy and particularly exports. Despite these efforts, the yen gained value against the U.S. dollar in 2016, which is the currency to which it is often compared.

Given that the Bank of Japan is the true innovator of QE and has engaged in the program on and off since the early 1990s following the real estate crash the country experienced in 1991, and given the persistent economic depression since then, many economists have remained skeptical of the program’s benefits. Indeed, the years 1991 to 2000 are often referred to as Japan’s “Lost Decade.” However, since the Bank of Japan is intent on devaluing its currency in response to its economic problems, many investors have been buying gold with yen in the belief that gold is in a long-term bull market relative to the currency.

Additionally, concerns have been raised about Japan’s ballooning national debt, which, according to the International Monetary Fund (IMF), currently stands at over one trillion yen (about $11 trillion), or about 245 percent of its annual gross domestic product (GDP). According to some research, once a nation’s debt to GDP level exceeds 100 percent growth slows down as the nation is forced to devote more of its resources to paying off the interest and principle of the debt, which reduces its ability to invest in future growth. The IMF also has expressed concern that the nation’s debt is on track to be triple the size of its economy by 2030 if action is not taken to change the nation’s fiscal trajectory.

However, according to Jim Rickards, author of “Currency Wars,” the cheapening of currencies globally has a primary aim of making sovereign debts less burdensome, and perhaps in this respect, QE, despite widespread reservations on its efficacy, will ultimately lessen the risks inherent in Japan’s massive debt.