(Inflation Information)

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Large-scale Inflation on the Way

February 17, 1999 (original)

April 16, 1999 (revised)



"Never in history has any government's bond that's beyond the repayment capacity been repaid by none other than inflation!"


It was stated by an up and coming economist in the fall of 1998. Large national budgets made possible by massively issued government bonds and by freezing policies for financial rebuilding, and rising demands for direct purchase of government bonds by the Bank of Japan (BOJ) are the footsteps of inflation steadily approaching us.


One can clearly hear it if one opens his ears as I, as an appraising specialist in real-estate, have always had a keen interest in the relationship between real-estate prices and inflation. "Would real-estate properties be able to function as a hedge against the coming large-scale inflation?" Using this as my point of view, I will fill up this home page.


Inflation Anticipated and Inevitable as Seen from Domestic & International Economies

By the end of March 1999, the nation's balance of accumulated total debt has reached 544 trillion yen. To repay this huge debt, the government might take inflationary policies. The market's expectation for this is expanding. Longing for another bubble economy is being taken over by that for inflation. Neither banks nor businesses have given up the resurrection of the myth that land dealing is profitable.


It is certain that inflation can have many "merits". The amount of repayment can be smaller for businesses, bad loans can be written off quickly. For the government, the burden of the bond can become less, that and the increased tax income can make ends meet more easily. For the home owner, repayment on housing loan gets smaller.


It was thought that "adjustment inflation" was one of the options for the "have it all" Obuchi Cabinet that had unconditionally widened policy options, uttering that "inflation" was no longer a taboo under his regime.


The way I see it, anticipation for inflation is a surface current and the deep current is that "inflation is inevitable." History has many examples of politically forfeiting bad loans. Never in history has any government's bond that's beyond the repayment capacity been repaid by none other than inflation! Just like history says.


Those anticipating inflation insist that it would be a great historical miracle if Japan's economy succeeds in processing bad loans, and rebuilding its financial condition without prolonging stagnation, or using the effects that inflation brings. Their stance is to bring the country out of its recession, Japan must keep its eyes closed on either one of the following issues: evading inflation, financial rebuilding, stimulating the economy, or processing bad loans. In addition, the world is into the era of paper currency that does not have any materialistic backing. For financial and economic policies, a new concept completely different from the one based on gold is necessary. This concept has developed and advanced into a theory that a new policy, inflation, that is, is required historically as well.


A louder voice that inflation may be inevitable is being heard in the world economy, too. The dollar's weakening has become obvious as its accumulated debt has reached the point where repayment no longer is possible, which may lead to the collapse of the international currency market with the dollar in the center. The yen, which can not support itself without international trading, will head for destruction. In order to prevent it from happening, the only option available is to hide the weakened dollar by further weakening the yen through inflation.


Since the yen is not a major international currency, the only option for Japan to survive is to heavily depend on the dollar on its way to destruction, just like a double-suicide.


Massive issuing of government bonds, which leads to large-scale inflation, is no easy option for Japan. Some even says that there is no other way to solve the two problems simultaneously - economic destruction to be brought by the great stagnation and the possible loss of peace to come after Japan's confrontation with the US. Latest statements by US officials must be carefully followed.


The deep current of economy is already moving to "inflation."

The official discount rate has been the lowest ever at 0.5% for the last three years and seven months. The Bank of Japan has loaned a huge amount of money to financial institutions through the Savings Insurance Organization, knowing the risk that the loans may not be repaid. The Ministry of Finance has also begun issuing a large amount of government bonds. With financial rebuilding through structural reformation has disintegrated in mid-air, it is very likely that further massive issuing of government bonds is inevitable. The ministry is trying to see if it can make the BOJ become a direct purchaser of the government bonds. The ministry's tax inspection on the BOJ a while ago could have been a signal that the fort of BOJ is under attack from the Ministry. Am I wrong?


After the April through June period, as the worsening of employment rate began to appear, the argument that additional measures were needed for recovery was induced, and the demand that the BOJ purchase government bonds directly emerged. The point in this is whether the BOJ could maintain the stance that it should never directly purchase the bonds. When the BOJ looks into the next hundred years of the nation's national budgeting, as buying the bonds means abandoning self-control in financing, which would surely lead the country into a real inflation.


The Cabinet's next scenario could only be either to expand the boundaries of existing financing laws or to revise them in order to take the inflationary policies by having the BOJ purchase the bonds directly, since it has already begun manipulating the last resort of financing. Even if the BOJ does not want to take aggressive measures to cause inflation, it still has to keep supplying a large liquidation for processing bad loans. Either way, the outcome would be the same.


Recent rise of the long-term interest rates, which automatically lowers the government bonds, can be understood as a warning signal from the market to current financial policies without any principal regulations. The market knows that stimulating the economy means inflation or higher taxes in the immediate future. With the current public debt reaching over 120% of the nominal GDP, the market is concerned about the fact that it is indeed the level that was experienced during the war in 1937.


The market's experience reminds them of a rather simple principle that the growth of the nominal GDP must exceed that of long-term interest rate just to cover the interest of the government funds for investment and loans.


The U.S., on the contrary, reacted sharply against the rise of the long-term interest rates.


The funds always flow out of the country with low-interest rates to the ones with high-interest rates. The U.S. economy can sustain big damage if the funds flowed from Japan becomes tight or the funds reverse its direction back to Japan. That the BOJ is keeping the short-term interest rate at virtually 0%, which is the last resort of their interest control policy, shows that the BOJ is actually trying very hard to keep the long-term interest rate low. The question then is what the outcome would be of the BOJ's experiment of keeping that kind of interest rate for an extremely long period of time, which has never been experienced by the world. One must keep one's eyes on this issue if one wants to view Japan's economy through inflation as a point of view.


How to Start an Inflation

External elements such as food crisis, oil crisis, war crisis can touch off inflation. They can not be lightly viewed. What we are now faced with is one that could be started by a financial crisis or the destruction of financing.


Many things can be done to start inflation, such as throwing money down from helicopters, putting money in bottles, and flowing them down rivers, and having them picked up by children, or distributing gift certificates to all the people. They are unrealistic ones. Here are some realistic ones, such as the BOJ purchasing large volumes of government bonds, and if there are not enough government bonds, reduce income tax to stimulate the economy, or increase the public works budget by mass issuing of bonds which the BOJ could directly buy as an option. From one of their options one could come up with simulations like the ones below:


1. If mere a 10% of the total savings (500 trillion yen in bank savings and agriculture cooperative association's accounts, and 240 trillion yen in the Postal Ministry's savings accounts) is withdrawn for some reason, a panic would take place.


2. The reason is simple: The BOJ is only capable of issuing 50 trillion yen, which is well below 70 to 80 trillion yen, 10 percent of 740 trillion yen. When it happens, the only countermeasure the government can take is to freeze the accounts temporarily. After the confusion, the government will be forced to have BOJ purchase the government bonds, which leaves the government no other choice but to go into inflation.


3. The increased issuing of bank notes can be estimated to be about 150 trillion yen. If it were the case, the estimated magnitude of inflation would be 300%, which means that the commodity price could be 4-fold and savings in the Postal Ministry would be one-fourth in value.


4. Massively issued bonds will sharply drop in price, driving domestic money out of the country. As a result, the yen will devaluate against the dollar sharply to 300 to 500 yen to the dollar. Mr. Tei Eikan, a writer, estimates that the BOJ will have to print 100 trillion yen, which will bring the inflation rate to about 8 to 10%, as 100 trillion yen divided by 1,200 trillion yen equals about 8%.


When will it happen?

The possible types of inflation and what can start inflation are: 1. Cost inflation (when wages rise exceeding that of productivity), 2. Inflation triggered by productivity gap (as in the case where servicing and financing costs of small- and medium-sized companies are relatively higher), 3. Inflation by financing, and 4. Imported inflation (as in the cases where the rise of imported commodities are seen, or when the yen depreciates in value.


What type of inflation and when is it going to take place? What is the inflation rate going to be like? How long is it going to last? The person who has the right answers for these questions indeed has a great business chance in his hands. It is considered that answering the questions correctly is far more difficult than telling the ceiling and bottom prices of future stock prices. If you keep your ears and eyes open and see and listen to what the world in depth has to tell you, you could hear the rampage of its approach and see it clearly.


As we predict from the domestic economy's point of view, the era of deflation and low-interest rates is coming to an end and it is heading for an era of higher-interest rates and inflation. With the nation's bankruptcy added to that condition, the rampage of a great inflation will go through the country by the year 2010, plus or minus one or two years.


A prediction from the global economy's point of view is: Effective policies for evasion from running into a deepening deflation are not anywhere to be found. Most of the countries in the world are faced with grave responsibilities of solving the problems by increasing currency supply - inflationary policy. Japan is no exception to this. The foregoing signs of inflation may start to be seen and felt between 2000 and 2003. By 2005, or 2010 at the latest, the world's inflationary trend is going to clearly emerge, especially in the demand and supply of resources like food and oil.


The heavy fall of the dollar may start inflation.

It has been 18 years since the dollar lost its convertibility to gold. What that means is that the dollar could go up and down in time of a currency crisis. If the U.S. should revive the gold standard, the gold price would be $4,200/ounce, 15-fold the current price ($280/troy ounce), which is gained by the division of 1.1 trillion dollars, total money supply of the U.S. by 261 million ounces of gold owned by the U.S. To briefly explain, the dollar's value will be one-fifteenth the current value, and the commodity price will be inflated 15-fold.


The possibility of the above may be small, but it could be used as a scale of measuring the weakness of the U.S. economy, which has been supported by massively printing of dollar bills. And the Japan-owned foreign currencies, which have been supporting the U.S. economy, and of the world economy system.


Demerits of Inflation and Its Opposing Arguments

Regardless to say, inflation brings reduction of assets. Money in savings accounts decreases, bringing extra burden on the people, especially those living off on earned-interests and retirement pensions, and senior citizens. Inflationary policies always processes problems by sacrificing the weak. They also rob the people, politicians and entrepreneurs of their thinking and bring moral hazards to them.


Rather than panicking by that deflation and run around like a chicken without a head, we have to squarely face deflation with our minds set firm. Do not let that 2% deflation intimidate us. The 5% consumption tax is not big enough. We will have to accept higher consumption tax rates, be it 10 or 15%. For a while, the growth rate will remain below zero, and the unemployment rate will rise. It is the task of politics to show us what lies ahead of these conditions. Set visions for the next 5 to 10 years, and achieve the goals of each year. Japan has high standards of living and the strength to put us through and endure the hardships along the way. What we need is a statesman who can show us the big picture and set our minds for the goal. Indeed what you have just read is right. But with our leaders the way they are now - taking no responsibilities or having no accountability - will this be accepted?

I have a persisting fear that the economy, without being discussed, just being driven by what is surrounding it, will dive into a big inflation.


In the small electoral district system, any candidates who state things in a straightforward manner cannot win the race. When asked, "How are you then, going to win the race and run the country without making speeches that will not bring in ballots?" Mr. Kozo Watanabe, deputy chairperson, answered, "The answer is simple, it's borrowing." His answer hits the nail on the head.


Inflation...Impossible! But really?

I have given thoughts on "inflation anticipated", "inflation inevitable", and "inflation objected." It will not be fair if we leave the question, "Inflation? Impossible!" out.


My discussion will not withstand criticisms without the last. After introduction of MIT's Professor Klugman's theory of inflation targeting policy, we began to hear discussions on inflation. He insists that unlimited supply of currency or ultra-financing policies with inflation rates set on the higher side must be radically carried through, not halfway through. But he has not insisted that BOJ's direct purchasing of government bonds must be carried out. The majority of arguments that inflation cannot be possible are aimed at this "adjusting inflation."


"Deflation is a phenomenon common to advanced countries. After the cold war, low-paid workers massively flowed into the world labor market, and as a result of this, it is a reflection of the world economy that an increase in production of low-priced products became evident. Therefore, inflation is not going to be here."


"Unlike the expectations of those who wish that adjusting inflation would come, but it is not that easy for inflation to come, because those massively printed bills will flow out of the country for higher interest rates."


"Anticipation for inflation can grow only after the economy leaves the recession behind, therefore, the concept of recovering the economy by means of inflation is not logical."


"The growth rate predicted and released by the government is not completely trusted by the market. In this context, it is highly unlikely that the government can provide a trustable target inflation rate, which will lead to inflation."


"The demand and supply gap in GDP ratio was 9.3%, or 45 trillion yen, as of December 1998. Inflation, in this condition, is unthinkable."


Each of the above opinions sounds right, especially the GDP ratio of 9.3%, or the demand and supply gap of 45 trillion yen, and seems to be convincing. However, the understanding that inflation is not likely to come when a big demand and supply gap exists may be questionable in financing, although it may be true in manufacturing.


The economy has never experienced anything like the one we are going through. There is no other way, but to think with your own head if you want to find out what the future holds for you.


Here is a review of the current economic situation seen from the "financing" point of view. The problems in financing are that the financing system has sustained a blow and that the banks' ability to create credit is not properly functioning. What it means is that there are not many that want to borrow, even if qualitative deregulation in financing is brought in. Money will not flow into the manufacturing industry with excessive production facilities, as they will not borrow. The vast amount of money in the market does not go into production activities. What will it bring us? Primary economics say every price is determined by the demand and supply relation. Interest rate is not an exception. Below is a simplified chart of this case.


A case study on worsening demand and supply in currencies

If currency supply increases       If currency supply decreases 


Over supply of currency      
Reduced number of borrowers,     
Reduced amount of borrowing

especially in the manufacturing


= Reduced demand for borrowing


Reduced value of money (prediction)

= Rising commodity prices (prediction)


More people want to borrow money,
More lenders, fewer borrowers,
Lenders want higher interest rates,
Borrowers have upper hand over lenders,

= Anticipation for inflation pushes     = Pushes down market interest
market interest rates up          rates                                   



This case study shows that there is now a confrontation of two pressures: One pushing up and the other pushing down in the state of currency over supplied. If the supply increases further expectation for higher interest rates (anticipation for inflation) will win over, and interest rates will start to rise beyond the gap of 45 trillion yen, which will turn into a wave of inflation. Is this prediction peculiar to amateurs?


Somehow the interest rate is "the thermometer of the economy" keeps coming back to my mind.


How do you prepare for the on-coming inflation?

The best hedge one can take against inflation is to borrow money and buy some land. The loan will be halved in inflation of 7% annually in ten years. The value of the land purchased increased three-fold. The "myth of purchasing land for profit" was actually a reality. The future land price as an inflation hedge in Japan is rather questionable. The land prices in Japan is about three-fold of those in Europe and America, which means the land price can come further down, it is predicted that land price will come down to the level of those places in the time span of ten years. Of course, once inflation sets in, it will push up the land price, but one cannot expect that the rise will be like assets in securities and land, which we have experienced. It will come down from three- to one-fold against the GDP.


The entire nation has been heavily burned by securities and land in the collapse of the bubble economy. In addition, it is difficult to think that people will be focusing on buying land, especially when the population is stabilized. The level of land prices in relation to the GDP in general may be coming down. Land in a nice business environment works fine as an inflation hedge in any inflation, needless to say. The question then is how can one tell a good one from a bad one, and when to buy.


Other traditional inflation hedges are: gold, foreign currencies such as the dollar, euro, stocks of worldly-known companies, investing in education for certificatation and qualifications. You will have to access the possible risks, and the returns, and accept whatever the results may be. What we can do now is to set up a high aerial so you can gather more information, and evaluate, research, and analyze information obtained.


A case study on running an apartment for profit in Moscow

A Japanese person purchased an apartment of 56 square meters at $38,000 for his own use in the suburbs of Moscow in December of 1993. He lived in it for a few months, and then is now leasing it to a non-Russian for $250 per month. The return on this transaction is: 7.9% ($250 x 12 months) = $3,000 divided by $38,000 = 7.9%

Russia has experienced an inflation of 6,000-fold after that.

As of February 1999, it is being leased to a non-Russian for $450 per month. An expert estimates the value of the unit to be $46,000. It's surface return rate is 11.7% ($450 x 12 months) $5,400 divided by $46,000. The owner is getting a return of 14.2% ($5,400 divided by $38,000), and it's sufficiently functioning as an inflation hedge.


The contract is in dollars, not in rubles. It is leased to a non-Russian.

It is located in Moscow where competition in housing is unlikely to happen.


The law may change and ban owning of apartments by non-Russians.

The law may change and ban owning of apartments by non-occupants.

It might remain unoccupied for sometime.

Managerial risks.

(Translated by Kenji Moriguchi)


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