The Sound of the Phrase “Something Bad”

How each individual perceives the phrase “inflation” is extremely important. It is likely that almost everyone understands and recognizes it as “something bad.” Just hearing the word inflation might bring to mind the First Oil Shock (October 1973), when the price of oil per barrel jumped from $3 to $11.7, followed by the Second Oil Shock in 1979-1980, when it rose to about $36. Those events led to the dreadful runaway prices. Although it will be covered in another article, currently (July 2008), the price has soared to over $140 per barrel, shaking the global economy. Indeed, inflation is synonymous with “anxiety and suffering.” To help people understand the essence of inflation in a relatable way, let’s introduce the following story first.

Forcing Water Down a Cow's Throat to Market — The Origin of Inflation

There is a story passed down from old times about British cattle ranchers who, when bringing their cattle to auction, would force water down their throats to increase their weight. This is the origin of inflation. This is the inflation of cattle. Come to think of it, souvenir products with false bottoms sold in tourist spots, which were once criticized, are also a form of inflation. Thus, inflation originally began with “bad things.” I want people to understand this clearly. While not unique to Japan, inflation is currently and will continue to be a major global concern. Combating inflation has become the top priority for the world economy.

What About Pensioners and Those Living on Interest Income?

Why do countries place such emphasis on controlling inflation? It goes without saying that inflation, being a sustained rise in prices, leads to a decline in currency value, meaning a decrease in purchasing power. A decline in currency value is nothing more than a loss of confidence in money itself. Both global and domestic economic activities are driven by money. When that money becomes unreliable, corporate management, household finances, and government budgets face a bleak future. Society becomes agitated and descends into chaos. It is only natural that countries would go to great lengths to maintain trustworthy currency.
The average savings per household across all households is just over 15 million yen (12 million yen for working households), but with inflation, the value of hard-earned savings will surely diminish. Even if one saves with a clear goal, such as purchasing a car, a house, or going on an overseas trip, these plans can crumble with inflation. The most pitiable are pensioners and those who rely on interest income for their livelihood. It is tragic. It is happening right now. It is only natural, as the face value of savings accounts does not increase in line with inflation.

What About Borrowers and a Common Misconception?

On the other hand, there is a widespread misconception that borrowers can profit from inflation. Is this really true? Banks do not lend money without a certain amount of savings. Therefore, households with debt must also have savings. It should be obvious by now. It is not just households without debt that suffer losses from inflation; households with debt also suffer the impact of diminished value. Of course, if inflation becomes extreme, measures of profit or loss, like those in former Russia, become meaningless. Please keep this in mind.