(Inflation Information)

Large-scale Inflation on the Way Part 2

September 9, 1999

The Japanese economy may have gone through the worst period. The economy must get back on its own feet while financing policies and supporting measures are still effective. The stock market and foreign currency market are reflecting this kind of wish in their daily movements. As one of those who think that inflation is inevitable, the author would like to look back on the economy in the spring through fall period. After publication of this series, I have received opinions, such as: "Since you are saying that an inflation is inevitable at a time when a shadow of deflation is in sight, you must have an eye for the economy and an ear that hears everything." "You are looking at the world through a set of polarized lenses." Somehow I like to stick to my title, "Large-scale Inflation on the Way" in this emerging concern for deflation as it might give you some kind of dream. That is why I am using the same title with an addition of "Part Two" for this issue.

In the last seven months, both of the arguments, "an inflation is inevitable" and "an inflation is welcome" are growing louder and louder and spreading. Just to remind the readers, I am on the side of the former, not the latter. Why am I emphasizing that? Because, I believe the latter is the losers' logic. In other words, the latter could be potentially facing their bankruptcy. They do not bother to try to change reality in this long-term deflationary state, and just wait and hope for inflation to take its course. They just wish, betting their fate, that land prices would soon hit bottom and start to rise again, just like the banks and general contractors that were defeated before them. They are on the same trail. The former, on the other hand, have come to the conclusion that inflation is inevitable after giving good consideration to existing reality and possible future scenario. The former predict after their analysis of the economy, that the current recession and deflationary state will expand and persist, and will be followed by a big wave of inflation that would hit the economy. The first measure to take against such a state is to get over the recession unharmed. Only after that, one would see the big wave of inflation. Only those who successfully got over the recession and accurately predicted the approach of inflation can seize the opportunity it will bring. In my previous report, I mentioned who might lose from the inflation, I should add, "government workers, and some of those who are in financial businesses" to the list. If one takes a good look at the lives, after the collapse of the former Soviet Union, of those Russian government workers who are tremendously suffering under their inflation of 6,000-fold. If one takes a good look at the financial businesses that were buying up government bonds at high prices under super low-interest rates (= high commodity prices), it is obvious they are taking a record loss in the fall of stock prices under inflation. They, too, are affected seriously.

The Bank of Japan's (BOJ) Stance

Mr. Hayami, president of BOJ, looks satisfied recently as the long-term interest rates are being suppressed and the stock market seems to be on its recovery process, which were brought about by keeping short-term market interest rates down to zero, a big gamble of his. Just as told by the U.S., Mr. Hayami kept his tight control on financing, and started the bubble economy around 1988. Because of this bitter memory, he, as the leader of the newly restarted BOJ, wanted to avoid surrendering to political demands that the BOJ should directly buy government bonds. To refuse such demands, he had to come up with some other alternative policy. That was his zero interest policy. He did not have any idea in his mind what the policy's side effects would be. He had to begin something and run while thinking. A side effect of his policy, rise in stock prices, must be pleasing him.

He had not carefully planned the process of bringing the interest rates to zero nor did he check into the possible side effects it may bring. Also he has been seen innocently enjoying his success which came accidentally. He does not seem to be aware of the spreading sense of crisis in and out of the market. BOJ workers are thought to be capable people. They are thought to have the foresight and ability to function as the guards of the currency. One of them whispered and said, "The reality may be that oil is being applied on the surface of dried fire wood, I cannot shake off the idea." It does not sound to be real especially when one is looking at the deflationary state. Hyperinflation could be started once ignited. The "brains" tell you that the intuition and the reality of an economist, while he is preoccupied by his daily routines, warns that a deflation may be on its way. But when he takes one step back and sees reality, the good sense of the economist warns you that inflation may be on its way. The sensitivity is saying deflation, and the "brains" are saying inflation.

Some began to voice the opinion that the Japanese economy must be rescued from the deflationary state, even if we have to eat the forbidden fruit of inflation. Pushed by this voice, large-scale financing has been continuing to be mobilized. If the BOJ starts to purchase government bonds, the economy may be killed by hyperinflation in the near future. Some say it could be better than being killed by the deflation on hand. Financial businesses are so structured that they can make more profit in the inflationary state than in the deflationary state, their true wish is: the BOJ should act more aggressively to the extent of leading the economy to inflation. As additional financing may push up long-term interest rates (= fall in bond prices) accompanied by the expansion of the red in financing, it could increase bad loans tremendously. If would then be inevitable that the government, in order to avoid this, will demand the BOJ to further loosen up controls in financing. If the government's promise to put the economy back on its growth course becomes difficult to achieve, it is easy to predict that there will be stronger voices demanding the government to apply temporarily-forbidden pressure on the BOJ to purchase government bonds directly. The BOJ will shift its policy from a deflationary one to an inflationary one when the recession (deflation) worsens beyond recovery. Sharp decline is the U.S. stock market, large-scale shut down of businesses, long-term interest rates staying up at the ceiling in the midst of an era of massive unemployed laborers, will force the BOJ to take inflationary measures. The shift will be lead by politics and it will be under the name of adjusting inflation. I am against the BOJ taking such action until such an extreme state begins to exist. For the time being, the BOJ has no choice but to continue to finance. That is BOJ's stance now.

Devaluated Yen (Shifting Foreign Exchange) and Inflation

Here is a review on the relation between the shift in the foreign exchange market and inflation. What it means is that the devaluated yen brings inflation, and inflation further pushes down the yen. Import prices go up and exporting becomes easier when the yen lowers its exchange rate, which in turn simulates the economy, leading it to an inflationary state. If and when the BOJ continues its massive financing and prints the currency accordingly, the value of the currency will eventually decline, which will bring down the yen's value. In other words, the two, devaluated yen and inflation accelerate each other; they are in a so-called "inflation spiral relationship".

The BOJ's fundamental stance is to continue its zero interest rate policy until the concern for deflation has been completely wiped off. For the BOJ welcomes imported inflation pressure that will be absorbed by existing deflationary pressure. What is in front of our eyes is a deflationary state, but specialists in international commodities say that the trend of the world economy is that the world is facing a sharp rise in demand. If and when the price of a commodity suddenly starts to rise, it will spread to the world quickly. And it will eventually affect other commodities. In the case of Japan where the currency is oversupplied, if import prices go up sharply, imported inflation will spread across the country, especially when the yen is being exchanged at low prices in the mid-term and long-term market. The imported inflation can trigger a larger-scale inflation here at home. Some say that some New York financial houses have already started to follow an inflation scenario. It is a scenario that a large increase in liquidability pushes up stock prices, which in turn activates the market, expanding production, which then in turn brings the economy into the expansion cycle. Some Japanese investors who had thought that the introduction of zero interest policy by the BOJ meant the beginning of inflationary policies began to buy stocks, golf-club memberships, and condominiums. Some are already buying up stocks of raw-material businesses. Loosening financing control alone is not enough for the people of Japan to begin to expect inflation and to start to choose commodities over their money. Some additional measures are necessary, such as the government's operation of buying dollars and selling yen --- leading the yen to lower rates. Also, the resurrection of the land myth supported by continued government support of land prices, further continuation and expansion of government financing activities, to postpone pay-off, and introduce more effective measures to increase bank loans. Some of these are being discussed, but they have not been fully put into practice in the all-out level in reality yet.

As of September 1999, utmost attention must be focused on the movements of U.S. stocks. If they get into a price-adjusting phase, they can start triggering a global-scale deflation. They do not have to plunge to start it. When it happens, Japan, as a country with the largest trade-surplus, will draw severer criticisms, pushing up the yen rates. Exports will decline, imports will incline, as a result of which, Japan's productivity level will decline --- a picture of deflation to deflation. Possibilities of taking inflationary policies may start to be openly discussed if this adverse circumstance becomes a reality. The BOJ's direct purchasing of government bonds must be kept unused as a last resort for such occasion. It might be heaven's will.

Inflation and Internet

According to the 1999 edition's white paper on communications, Japan's internet population is about 17 million, over 10% of households have access to it, and over 100,000 individuals are now buying and selling stocks on the Internet. In a few years, the gaps of information and income between the 40% of Internet users and the 60% of non-Internet users, will be beyond imagination. In the U.S., the leading nation using the Internet, the correlation between household income and the use of computers with accessibility to Internet has become prominent. That means if one does not have a computer or access to Internet, it is depriving himself of opportunities to be educated, thus, creating a huge gap among people in different income classes. The Internet age brings a bigger gap in information level (= income) to those who have it and those who do not. Inflation in the Internet age makes this trend more definite. Those who have more information on inflation and its tendency through the Internet will profit more than those who do not.

The second characteristic of Internet is that it will make the market and market information more open. Both consumers and investors can have more accurate information in real time. The black box can not exist here. Stock dealings, including prices, are lead by the consumers and investors. Through the Internet, you can be in your home and find out what the weather is like in the green belt of America. You can see what is in the future, if you have the special ability to see it. The volume, speed, and quality of the information are going to change the world drastically. More accurate information will reach the general public, investors, and consumers more quickly. This widens the gap between those who have it and those who do not.

Inflation and Business Opportunities

We are in a time in which every existing value and pricing system is collapsing, including the myths (credit based on land and continued growth). In other words, everything must start from zero. It means a wonderful time with opportunities for anyone. Humans are animals that always pursue profit. They are always looking around for good occasions to make profit. Where do the smell and sense for profit come from? They came from only one place: prices. Smelling that something is strange, some with a good sense of smell and intuition have started taking counter-action in this decade of deflation. The actions are not necessarily buying gold, stocks, or real estate, rather, it is gathering information and educating himself in preparation for inflation.

To survive, one has to gather real information and see this as a good business opportunity. The real information must be one that others do not have. One has to carefully plan how to use it. The real information is hidden in some confidential place: it is the imagination, or insight one has to utilize, to extract the trend of the times from the vast amount of articles in the mass media. When one has a strong grip on the trend, the chance will present itself. The nation will be facing difficult times, including bankruptcy of the country (=inflation). The difficult times can be interpreted in two ways: business chance or hardships. It reflects how one sees life. The trend in the first decade of the 21st century is predicted to be: 1. Deflation to inflation 2. Recession to bankruptcy of the nation 3. Postponing bad loan processing while restructuring the economy 4. Giving growth the priority over other matters and focus on environmental and food issues.

Countermeasures against Inflation

Countermeasures against inflation can be different for individuals and the nation. But basically they are the same. The nation is not going to help individuals out when it goes bankrupt. It will not be able to even if it has an intention to do so. The only protection that an individual can have is to acquire the ability to foresee. The basic countermeasure against inflation, both for the company and the individual, is to acquire the ability.

It is too late to start taking actions against deflation and recession after they are before your eyes. One should have started preparing for inflation. If you fail to do this now, you will not be able to take effective countermeasures against it when it is actually before your eyes. In this ten-year long recession one must begin to prepare for the bottom of the great recession that is yet to be seen. Do not fall into traps losers fall in: To hope for an inflation. If the individual fails to overcome inflation or deflation using his own wisdom or intelligence, he is going to have the short end of the stick. With a clear picture of "stagflation" (inflation under recession), prepare for the coming of the great recession that is yet to come.

What kind of business would be enjoying growth in times of inflation? It is not determined by the mere size of the business, it is determined by the power or energy of the business. The 21st century can only be opened by ones with this power or energy. What are the characteristics? They are with the following characteristics: 1. Being one and only in the industry 2. One that is fully capable of managing its assets 3. One that can gather information and use it to make future scenarios 4. One that can reduce risks by networking 5. One with a workforce capable of catching trends 6. One that can survive without having to depend on assistance from the government nor others.

As for individuals, reorganizing their individual assets is crucial. The bottom line in times of inflation is to own commodities, not cash on hand. Savings account in dollars, dollar funds, and gold are recommendable if one can see when to buy, especially gold as its price is determined irrelevant of any government's intention. The worse the recession gets, the brighter it glitters, especially in chaotic times.

If one thinks gold will appreciate, then buy stocks of gold-mining companies. If one thinks silver will appreciate, then buy stocks of silver-mining companies. Since raw materials and food stocks are strong during inflation, stocks are strong countermeasures.

But as of September 1999, one must not buy land or real estate as an inflation hedge. Never buy those that are "good for nothing and flawed" no matter how cheap they may be. If one can expect that they will bring in stable revenues, then one might want to buy them. You will be killing yourself, if you invest in a one-room apartment at fluctuating interest rates. Just a rise of 2 to 3% in interest rates can swiftly change the balance. It is just like buying stocks of a declining company on borrowed money.

The best investment, or inflation hedge, is in oneself in this time of inflation. Acquire the abilities or capabilities which make him a perfect supplier of services or goods indispensable in this time of recession. Those with these abilities or capabilities will have more and more income as commodity prices go up. Inflation can do no harm to him. Therefore, the best preparation for inflation is to increase the ability to gather more information so that he can react swiftly when the time comes.

When will it be here?

It is extremely difficult to predict with accuracy when, in what form, or what will start inflation. One can, however, more or less predict it if one can catch the trend. The following are some brief trends and forerunners of inflation:

---Buying of Japanese stocks by foreign investors shows their anticipation for inflation---

What they have in mind when they are buying Japanese stocks are neither rebuilding of the Japanese economy nor resurrecting Japanese banks. They are expecting the resurrection of the bubble mood (= asset inflation) by the introduction of public funds and money flowing into banks through the zero interest policy.

---Deep current of inflation (1)---

In addition, one billion people in advanced countries who have been enjoying the materialistic civilization and 4.8 billion people in developing countries are beginning to join the race for more materialistic prosperity. Insufficient supply capacity is going to be exposed sooner or later.

---Deep current of inflation (2)---

The entire world wants to maintain its growth rate. It will try very hard to secure commodities even when prices go up due to the short supply, leading it to a vicious circle of increased demand and short supply to increase in prices, leading to haste action to secure commodities.

---Deep current of inflation (3)---

The yen has no other choice, but to increase its supply both in the domestic and overseas markets be it intentionally or unwillingly.

---Deep current of inflation (4)---

In the economy, any movement, once it has started, must go on until it is beyond the point of no return. If the anti-deflationary policies (=inflationary policies) are continued until the signs of inflation are visible, it will eventually lead to a real inflation.

---When is inflation going to start? (1)---

While deflation is in progress, people will expect further lowering of commodity prices, and hold onto their cash, even if they have distrust or worries about their currency. They will start buying commodities once they think there is nothing to be cleaned up after reconstructing banks and businesses are finished, which will start inflation. Once it is started, it will spread quickly in the times of Internet.

---When is inflation going to start? (2)---

Inflationary pressure is going to be felt when asset deflation and bad loan issues are just about to be finished.

---When is inflation going to start? (3)---

It will be a question of when that the BOJ will be forced to further deregulate quantitatively. When U.S. stocks enter an adjusting phase, the U.S. government will pressure the Japanese government to do so, which will start inflation.

---When is inflation going to start? (4)---

The X-day will be March 31, 2000. Stock prices and foreign exchange rates of that day will have a big significance. By the end of May, settlements of accounts for financing houses will be on the table. The people will start shifting their funds once they see them.

---When is inflation going to start? (5)---

Right before the pay off is to start, the government will not be able to do anything as it will be deeply in the red. What would come to the minds of people at that time will be the fear whether they can live the rest of their lives on the money withdrawn from their accounts. They will start buying commodities since they have distrust in the place which issues paper currency.

---When is inflation going to start? (6)---

Once an earthquake of the magnitude of the Great Tokyo earthquake or the Great Tokai earthquake hits us, the damage in terms of yen it could cause will be 100 billion yen, ten-fold of that of the Great Hanshin earthquake. This can also start inflation.

---How long will inflation last?---