Inflation - how are you protecting yourselves?

[IloveJapan]

Hello everyone, hope you are all keeping well.

Right now, it seems to me that Japan may face a “double whammy” in inflation terms, given the huge spike in commodity prices, which I believe are not just due to the war, as well as the MASSIVE decline in the yen that has been occurring (quite a spectacle!).

In light of this, I am wondering what everyone is doing to protect themselves. For example:

1) Do most people keep their money in foreign currencies, or are they happy to have it in yen?
2) What sorts of inflation-friendly investments are people making?
3) Is the 0% bank interest bothering people?
4) Are you looking for a better job? Or to get a house rather than rent (a difficult issue if properties are designed to only last 20-30 years)

I even wonder how state pensions will stick to their commitments if inflation is really high…

Anyway, I’ll be grateful to hear your thoughts everyone! Take care, all!

[RetireJapan]

In light of this, I am wondering what everyone is doing to protect themselves. For example:

1) Do most people keep their money in foreign currencies, or are they happy to have it in yen?
2) What sorts of inflation-friendly investments are people making?
3) Is the 0% bank interest bothering people?
4) Are you looking for a better job? Or to get a house rather than rent (a difficult issue if properties are designed to only last 20-30 years)

I even wonder how state pensions will stick to their commitments if inflation is really high…

Very timely as we approach 130 to the USD

1) most money is invested, emergency fund in yen, still earning/saving so not particularly bothered about temporary inflation
2) global stock index funds
3) nope
4) quite the opposite (trying to retire). We bought our manshon a few years ago. New houses are higher quality and should last much longer, older houses last much longer if you take care of them.

State pensions will meet their commitments by printing money if they need to. I cannot imagine a government not honouring that promise to the population.

[eyeswideshut]

1) Do most people keep their money in foreign currencies, or are they happy to have it in yen? To the extent I have cash it is mainly in Yen (which is where most of my financial obligations are).
2) What sorts of inflation-friendly investments are people making? Overseas stocks, bonds, real estate and gold.
3) Is the 0% bank interest bothering people? Not yet but it will if inflation really picks up here (haven't noticed it much yet).
4) Are you looking for a better job? Or to get a house rather than rent (a difficult issue if properties are designed to only last 20-30 years). Starting to wonder if I should be asking for a raise given that my salary has taken a 25% reduction compared with my overseas colleagues over the last several years thanks to the Yen.

[IloveJapan]

Thanks for your responses. I am definitely curious to know how long a recently-built house or apartment would last if it is different from my stereotype…sometimes I hear figures like 50 years…I don’t know if they could be handed down through the generations though. Definitely should look to do my homework there.

One interesting thing about inflation in Japan is the phenomenon of “shrinkflation” seems very prominent. On other words, buying a packet of widgets today will be the same price as 3 years ago, but the number of widgets in that packet will be less.
That is because people handling family finances are ultra-sensitive to any increases in the sticker price, which makes the makers or suppliers raise prices in that indirect or subtle fashion.

One restaurant I really like for its food and atmosphere has been putting less food on my plate, the rice I think, in the last year or two. Another time I insisted that the size of a cake in a different restaurant had become smaller (same price). The manager denied it, but another waiter told me I was correct!

And now, lo and behold, I am in Starbucks, where the price of my Earl Grey has just risen about 14% from 374 yen to 430 yen!
Do you guys have any experiences like these recently!

Well anyway, I tend to work with the assumption that the real value of my bank balance is declining faster than it looks…

[Tkydon]

Thanks for your responses. I am definitely curious to know how long a recently-built house or apartment would last if it is different from my stereotype…sometimes I hear figures like 50 years…I don’t know if they could be handed down through the generations though. Definitely should look to do my homework there.

The numbers quoted are the Accounting Depreciation Standards for depreciating assets for accounting purposes.

https://elaws.e-gov.go.jp/document?lawi ... 0000040015

Residential Buildings 住宅用:
Metal Reinforced Concrete Structure - 47 Years
Brick or Stone Block Structure - 38 Years
Metal Structure >4mm - 34 Years
Metal Structure 3-4mm - 27 Years
Metal Structure <3mm - 19 Years
Timber Framed Structure - 22 Years
Timber Framed Mortar Structure - 20 Years
Interior Fixtures and Fittings - 15 Years

This is obviously for accounting purposes, and if the structure is properly maintained and repaired it should last a lot longer than the Accounting Useful Life.

However, when buying older properties, the state and age of the property will be taken into account, and you will probably be paying more for the land and less for the structure. As the structure depreciates you would expect the land price (which does not depreciate) to appreciate over time to counter the structure depreciation.

Another thing to remember is that older properties were built before the Great Kobe Earthquake, and the Building Code has been both strengthened and enforced since then in order to protect residents/owners. e.g. There was a thread recently discussing houses built in the shadow of slopes, that could be refurbished, but it would not be possible to demolish and rebuild on the plot due to the Revised Building Code.
Other properties in Kobe were built out of compliance, but the rules were never enforced, so they were built bigger than the Building Regulations would permit, and so it was not possible to rebuild on the plot after the property was demolished by the earthquake, as the plot size would not support the size of property, or there may be Set-Back Regulations stating that if the property was ever demolished and rebuilt, the land-owner would have to forfeit a strip of land off the front of the plot for road widening...

Other than that, by the Rule of 72, if the land price appreciates at 2% per year over the life of the property, the land value will double in 72/2 = 36 Years... and double again in 72 years..


Even if you bought a property in another country, you would have to maintain the property, and probably do major refurbishment over the life of the property; new roof, new bathroom and kitchen, new carpets, redecorate (wallpaper and paint), possibly install central heating in an older property, build an extension, or do major reform, etc., so that is not so different to Japan at the end of the day...

Whilst Japan is building a lot of new properties - one of the reasons why properties do not rise significantly in price - there are many older structures that are being refurbished, and then are fit for long-term occupation.

The reason properties appreciate in value in other countries is due to the lack of inventory on the market. In the US, new house starts had been severely curtailed after the GFC, and recent issues related to Covid and delivery times have further impacted both supply and demand.

If you buy a New House, you are paying some additional charges; Sales Commission, Consumption Tax, etc., in addition to the standard Stamp Duties and other expenses, which mean that if you tried to sell the property in the near-term might leave you with a loss (like driving a new car off the lot)...

Buying a used property may well save you Sales Commission, Consumption Tax, etc., and allow you to negotiate down the price...

One interesting thing about inflation in Japan is the phenomenon of “shrinkflation” seems very prominent. On other words, buying a packet of widgets today will be the same price as 3 years ago, but the number of widgets in that packet will be less.
That is because people handling family finances are ultra-sensitive to any increases in the sticker price, which makes the makers or suppliers raise prices in that indirect or subtle fashion.

One restaurant I really like for its food and atmosphere has been putting less food on my plate, the rice I think, in the last year or two. Another time I insisted that the size of a cake in a different restaurant had become smaller (same price). The manager denied it, but another waiter told me I was correct!

There is always more than one way to skin the proverbial cat.
e.g. The reason for the invention of 'Key Money' '礼金' was that the American administration instigated rent controls in post-war big cities, so the rents could not be raised, so land-lords circumvented the controls by charging a couple on months' rent up front as a 'Thank You Gift' for letting you rent their property - 2 months' Reikin is equivalent to rent increase of 2/24 = 8.3% over a 2-year rental contract...
Now they just can't get rid of it, but many places will negotiate to remove Reikin for Rent and Shikikin...

And now, lo and behold, I am in Starbucks, where the price of my Earl Grey has just risen about 14% from 374 yen to 430 yen!
Do you guys have any experiences like these recently!

Well anyway, I tend to work with the assumption that the real value of my bank balance is declining faster than it looks…

The problem is, due to Quantative Tightening and Central Banks rising interest rates, the value of your investments is also probably in for a period of decline as well...

Rising Interest Rates will cause P/E Ratios to contract causing equity prices to fall
Rising Interest Rates cause Yields on on Bonds to rise, and cause bond prices to fall
Rising Interest Rates on Margin Accounts will force liquidations of assets
Overseas, Rising Interest Rates will cause Home Loan payments and Rents to rise, reducing demand, possibly leading to increasing defaults, all leading to price falls

Falling Asset Purchases and Roll-Off of assets on the Central Banks' balance sheets will lead to a liquidity crunch, causing a reduction in banks being willing to make loans

And the list goes on...

Due to the current historically-low interest rates, outstanding bonds that you currently own, bought at very low yields, will not act as a hedge against inflation. Rising Interest Rates cause Yields on Bonds to rise, reducing the prices of those bonds. Therefore, bonds will only protect you against inflation if they are index- or inflation-linked, or if you purchase them After the interest rates have been raised and are fully reflected in bond yields and prices...

If everything else goes down more than the rate of Inflation, then even cash falling in value due to and at the rate of inflation still performs better than other assets...

Given current JPY exchange rates, it is probably a good time to repatriate foreign assets to JPY, to be invested in domestic assets or deposited in domestic banks, until such time as the JPY exchange rates revert to lower (Yen Strength) levels, and the equities and bond markets shake out...

Right now, my personal view is that JPY Cash is King!

My 2c