“Hyperinflation and people”
Image extraction: DALL・E2
During the so-called Corona Shock, I was unable to make satisfactory trades, and upon reflection, I realized that I hadn’t been adequately mentally prepared or anticipated actions for my investment activities, even in a rudimentary way.
Overwhelmed by the global pandemic, I fell into a state of mental paralysis and couldn’t even hold a tentative selling position in the face of what seemed like falling stock prices. It’s an embarrassing story.
From these reflections, I decided to anticipate as many situations as possible. This time, it’s about hyperinflation in Japan.
Hyperinflation
Hyperinflation refers to the condition where excessive price increases lead to a loss of confidence in the currency, resulting in unstoppable price inflation. Specifically, under international accounting standards, it is defined as a situation where the cumulative inflation rate exceeds 100% over three years.
As of November 2023, the Japanese yen continues to hit record lows against various currencies. Against the US dollar, it’s around ¥150 to $1, and against the Euro, it’s about ¥160 to €1.
For Japanese people living abroad who need to frequently exchange Japanese yen for other currencies, especially those residing in North America or Europe, this situation must be quite burdensome. Personally, I find it quite troublesome too.
Since the 2000s, countries like Zimbabwe, Iran, North Korea, Venezuela, Argentina, and Turkey have experienced hyperinflation. It appears that Argentina and Turkey are currently in the midst of ongoing hyperinflation.
It also occurred in Germany and Japan.
A famous historical example is post-World War I Germany, but some also suggest it happened in post-World War II Japan. It appears to have occurred around 1945 to 1949, with prices in 1949 being about 70 times higher than four years earlier. For instance, a can of juice worth ¥100 costing ¥7,000…? It’s unimaginably extreme.
The phrase ‘some also suggest’ is used because some argue that a 70-fold increase over four years does not meet the criteria for hyperinflation, which, according to international accounting standards, is a cumulative inflation rate of over 100% over three years. Regardless, it was a terrifying situation.
Subsequently, the Japanese economy recovered due to the special demand brought about by the Korean War, which lasted from 1950 to 1953. The journey to recovery included the fixed exchange rate of $1 to ¥360 by the GHQ and austerity measures leading to a deflationary recession. For someone of my generation, it’s hard to imagine the chaos following the war, but it’s easy to presume that just surviving was incredibly challenging. Both of my grandparents have passed away, but thinking about them living through such times fills me with an even greater sense of respect.
Possibility of hyperinflation in Japan
With the recent sharp decline of the Japanese yen, which can be described as a ‘crash’, there seems to be a growing concern about the potential for hyperinflation in Japan.
However, it is a common belief that hyperinflation will not occur in Japan, considering the market size and system. While some, like a former JP Morgan executive, continue to sound the alarm, the impression from Japanese media and social networks does not seem urgent. The tone regarding Japan’s fiscal situation is uniformly negative, though.
But there are no absolutes in the market.
To prepare for any unforeseen situations, ‘psychological preparation and action planning’ should be done for all scenarios, including the possibility of hyperinflation in Japan.
Preparation for Hyperinflation
…that said, there aren’t many things one can do, and some might say investors don’t need to change their usual asset allocation too much.
This means converting Japanese yen into foreign currencies other than the yen, gold, and for some, Bitcoin or real estate.
Some include Japanese stocks, but personally, I find that dubious. If hyperinflation were to occur, the economy of the affected country would be in shambles, and it’s unlikely that companies could operate normally, likely leading to a significant drop in stock prices overall.
This point differs from the strategies for conflicts or wars, such as China’s aggression towards Taiwan.
If that’s the case, the situation would naturally impact countries that trade with Japan, potentially leading to a global scale ‘Japan Shock’ in hindsight.
Preparation for a Japan Shock
In such a scenario, I assume reliance on U.S. Treasury bonds would be necessary, but gold and Bitcoin might also be considered. The key is to quickly escape the stock market.
Regarding foreign exchange, it seems better to avoid touching any currency pairs as tumultuous charts are expected to continue. Trading in dollar-yen or cross-yen might be halted, and even if it’s possible, the spreads could be outrageously wide like the current Turkish Lira.
Government Response to Hyperinflation
Looking at past examples, when hyperinflation (or something similar) occurred in Japan during 1945-1949, measures like ‘deposit freezes’, ‘new yen currency swaps’, and ‘wealth tax’ collection were implemented.
On February 16, 1946, there was an announcement to stop the circulation of existing banknotes and issue new ones starting March 3. In this process, withdrawal limits were set to 500 yen per household per month (essentially a deposit freeze), and these withdrawals were switched to new yen.
Banknotes of 5 yen or more were forcibly deposited into financial institutions.
Regarding the ‘wealth tax’, it was a progressive tax ranging from 25 to 90%, applied to assets such as cash, bonds, and real estate. Essentially, the wealthy had most of their assets confiscated.
The idea was to combat inflation by supplementing cash shortages with taxes and reducing the amount of currency in circulation.
However, these measures did not immediately quell the hyperinflation-like situation. Eventually, the introduction of a fixed exchange rate system and austerity measures (the so-called Dodge Line) succeeded in controlling inflation. This was the sequence of events.
Is today really different from the past?
It feels like a wild time in history, but the question is whether something like this, or something similar, could truly not happen today. That’s what we ordinary people want to know.
Government policies that could be likened to extorting from its citizens seem unimaginable under normal circumstances.
It’s hard to imagine a situation of unprecedented crisis necessitating such measures in Japan, unless it involves natural disasters or nuclear war. But it’s difficult to envision a scenario grave enough to warrant concerns about deposit freezes.
Yet, for the one in a million chance, it might not be a bad idea to transfer a small portion of assets abroad or convert them into something less likely to be confiscated by the government. I think I’m not the only one feeling that international circumstances and the times have led us to this point.
Assets that seem unlikely to be confiscated and can retain value might include precious metals, jewelry, wine, watches, and maybe even Pokémon cards. Though Pokémon cards might seem more likely, very few people would actually take such action.
After all, preparing for post-hyperinflation deposit freezes and wealth tax in Japan by buying Pokémon cards is an indescribably odd move, especially without enough knowledge to make it a sound investment.
I want to clarify that this is not at all a dig at those already investing in Pokémon cards.
To summarize:
1.
Hyperinflation in Japan
↓
Exchange Japanese yen for foreign currencies (US dollars, Euros), gold, etc.
2.
Japan Shock (Global Recession)
↓
Purchase U.S. Treasury bonds
3.
Deposit freezes and wealth tax
↓
Purchase precious metals, jewelry, wine, watches, Pokémon cards, etc.
These actions need to be taken in advance, sensing the mood. It’s an extremely difficult task, and almost impossible to do just before it happens.
While some investors might already be prepared for 1 and 2, only the wealthy with substantial surplus funds are likely prepared for 3, Pokémon cards aside.
In any case, it’s clear that we’ve entered an era where ‘anticipating all possibilities and preparing for them’ is a must in investing.
