In the past, before China appeared on the world gold market, Japan stood as one of the largest gold importers globally. During the 1980s and 1990s, my primary role in physical gold trading at a trading house involved importing physical gold from Australia, Switzerland, London, South Africa and other sources. However, the dynamics of this business gradually shifted after the introduction of a consumption tax, and more dramatically after the bursting of Japan’s economic bubble after the 2000s, following which the country became a net exporter of the gold, marking a 180-degree turn in our business operations.

During my 14-year tenure at a Tokyo bank branch, we imported gold only once but exported it countless times, mainly to Asia and when demand waned in Asia, to London. The consumption tax, initially introduced in 1989 at 3%, escalated to 5% in 1997, 8% in 2014 and finally 10% in 2019. What does this have to do with gold investment? Well, when you purchase gold in Japan, you have to pay this tax, but you will get it back when you sell it as the tax should be borne by the person who consumes it. In theory, this consumption tax should not have a negative effect on gold investment. Instead, it has its advantages, as you can now receive 10% over the selling price, regardless of whether you paid 0%, 3%, 5%, 8% or 10% tax when you bought it.

However, this consumption tax had significantly different impacts on Japanese gold market. We did not fully comprehend its profound impact it on the market until perhaps the early 2000s. In contrast to the tax treatment of gold in foreign countries, such as Hong Kong, where there is no value-added tax on gold purchases, bringing gold from Hong Kong to Japan without customs declaration and selling it here would allow you to add the consumption tax on top of the price, now at 10%. A 10% profit on gold incentivised extensive smuggling by both individuals and large-scale criminal organisations. Long liquidation of gold at the higher yen price and smuggling were the two primary reasons behind Japan’s gold exports, despite having only one small gold mine that produces just several tonnes annually. The Japanese government eventually took strict measure to combat gold smuggling by customs and instructed business not to buy gold if they could not prove they had officially paid the consumption tax. Although smuggling still persists to some extent, we assume the volume is now lower than it was in the past, and its influence on the Japanese gold market is dinimishing.

Now, gold is garnering more attention in Japan than ever before. In 1971 when US President Nixon announced the detachment of the dollar from gold, the gold price started to float from $35 per troy ounce. 51 years after, gold reached $2,000 per troy ounce, marking a staggering 57-fold increase in value against the US dollar. As of the timing of writing this article, the gold price in US dollars hovers around $1,980 per troy ounce. This trend reflects a natural process, as governments of the world freely print the fiat money as they see fit, while gold supply is limited.