Why Was the First Time 'Frenzy' and the Second Time Not? — The Oil Shock and the Difference in 'How Money is Used'

The 'frenzy prices' that struck Japan in the 1970s. The image of people fighting over toilet paper has been passed down as a symbol of the oil shock. But what if the real culprit wasn't just 'high crude oil prices'? Why did no panic occur during the second oil shock? Through a conversation between Yoichi Takahashi and Mototaka Ikawa, and the sense of unease felt by today's 'NISA generation,' we now unravel the true nature of inflation and the mechanics of the economy.

※This article is an easy-to-understand blog version of the podcast 'Why Was the First Time "Frenzy" and the Second Time Not? — The Oil Shock and the Difference in "How Money is Used"'.

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1. The True Culprit of the First Oil Shock: Not High Crude Oil Prices, but 'Printing Too Much Money'

It is generally believed that 'prices rose because crude oil prices quadrupled,' but the facts are different. In reality, Japan's inflation rate had already reached 15% before the Middle East war even began.
The cause was 'excess liquidity' by the government and the Bank of Japan—in other words, printing too much money. At the time, the Bank of Japan conducted large-scale dollar-buying interventions to curb the rapid appreciation of the yen, and as payment, it flooded the market with a massive amount of yen. This rapid increase in the 'monetary base' was the true fuel for the frenzy prices, and high crude oil prices were merely the final push.

2. Why Did No Panic Occur During the Second Time?: The Bank of Japan's Lesson

Crude oil prices also rose during the second oil shock in 1979, but the 'frenzy' of the first time did not occur. What made the difference was the Bank of Japan's policy shift.
Reflecting on the failures of the first time, the Bank of Japan strictly controlled the monetary base during the second time to prevent it from increasing. Because they stabilized the foundation of the 'amount of money,' even when the spark of high crude oil prices arrived from the outside, it did not turn into a massive fire that consumed the entire society. From a macroeconomic perspective, this is a case that proves price stability is determined by the stance of the central bank holding the 'reins of money'.

3. Behind the Toilet Paper Panic: 'Fake Shortages' Created by Housewives and the Media

From a micro perspective, the panic at the time can be explained by understanding the 'inventory mechanism.' Manufacturers and distributors usually only have about 1 to 1.5 months of inventory. When media reports fueling anxiety that 'it will run out' were added to this, consumers bought 'two just in case,' and the inventory disappeared from store shelves in an instant.
According to Mr. Ikawa, former chairman of Daio Paper, toilet paper is a capital-intensive industry, and production volume is always constant. Since 'the number of times you go to the bathroom doesn't change,' even if hoarding occurred temporarily, it only meant inventory piled up in households, and in the long term, it only served as a factor to lower the unit price for manufacturers. The panic was a temporary phenomenon that occurred when 'excess money' and 'group psychology' aligned.

4. Why Inflation Theory Doesn't Click with the Modern 'NISA Generation'

For modern people who have experienced the 'Lost 30 Years,' the theory that 'if money increases, inflation will occur' is difficult to understand. This is because, in modern times, even if money increases, it is not used for consumption but is locked away in isolated facilities called 'savings' or 'NISA (investment)'.

The 1970s was an era where 'the value of money drops just by holding it,' and people competed to exchange money for goods. However, in modern times where a deflationary mindset has taken root, the 'velocity of circulation' of money has dropped extremely low. Inflation is not simply an increase in the amount of money; it only runs out of control when a chain reaction of psychology occurs, where people think, 'If I don't exchange it for goods right now, I will lose out compared to holding money.'

Summary: Beyond the Paradox of Inflation

The true nature of inflation is a phenomenon that appears when the macro 'money supply' and the micro 'corporate pricing and consumer psychology' intersect. The lesson of the first oil shock is that even if there is a spark of 'anxiety (psychology),' it will not lead to a frenzy without the fuel of 'printing too much money (macro).'
We are now hearing the footsteps of inflation once again. However, if we correctly understand the causes of the past 'frenzy,' there is no need to fall into panic unnecessarily. What is important is not to be misled by the images being circulated, but to discern the 'movement of money' behind them.

Podcast 'Why Was the First Time "Frenzy" and the Second Time Not? — The Oil Shock and the Difference in "How Money is Used"' is now available
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○ Errata for Audio Reading
Around 6:07: 'en o hatte' (stretching the yen) → 'en o sutte' (printing the yen)
Around 9:41, 9:43: 'tsuyoirarete' (being strong) → 'shiirarete' (being forced)
Around 9:48: 'kitananda' (came and what) → 'takuranda' (plotted)
Around 10:46: 'tezuna' (hand rope) → 'tazuna' (reins)
Around 13:44: 'okane o hatta' (stretching money) → 'okane o sutta' (printing money)

○ Reference Materials