In March 2013, I became independent almost simultaneously with the beginning of Abenomics. While I did not become independent because Abenomics began, it is certainly true that I felt the changes that Abenomics could bring would serve as a tailwind for entrepreneurship. At that time, I wrote a column about what impact Abenomics would have. Twelve years have passed since then. In this column, I would like to review the accuracy of those predictions and forecast the post-Abenomics era over the next 10 years.

■Prediction 1: "Monetary easing under Abenomics will cause USD/JPY to fall to around 110 yen" → 60% accuracy rate

When the second Abe administration took office (end of December 2012), the USD/JPY exchange rate was approximately 87 yen. With the full launch of Abenomics, rapid yen depreciation progressed, and USD/JPY reached 120 yen by the end of 2015. Subsequently, USD/JPY fluctuated in a range of around 110 to 120 yen, and this trend continued until the end of 2021. Since the original prediction assumed a timespan of approximately 10 years, it can be said to have been generally accurate.

However, what had a decisive impact on subsequent USD/JPY movements was a massive event that overturned these trends. It was disease (COVID) and war (Ukraine). To suppress the economic impact of COVID, which began in earnest in 2020, governments worldwide implemented full-throttle fiscal spending and monetary easing. As a result, money flooded the world. This, combined with demand stimulus measures that continued even after COVID subsided, became a potential source of inflation. The decisive trigger was Russia's invasion of Ukraine that began in February 2022. Supply chains already disrupted by COVID became further chaotic, and the world entered a phase of severe inflation.

U.S. inflation rates reached approximately 8% at their peak (2021-2022). The Fed shifted from accommodative policy to tightening, implementing multiple rate hikes in a relatively short period, pushing forward with inflation control. While the U.S. turned to rate hikes, Japan, where stable price increases could not be said to have definitively taken hold, maintained zero interest rates, rapidly widening the Japan-U.S. interest rate differential. This caused USD/JPY to jump from the 110-120 yen range to the 140-160 yen range at once. The chart at the beginning is an AI (ChatGPT) analysis of the correlation between USD/JPY movements and the Japan-U.S. interest rate differential (10-year government bond yields). The correlation coefficient is extremely high at 86%, and it can be said that USD/JPY fluctuations since the Fed began raising rates can almost entirely be explained by the Japan-U.S. interest rate differential. This analysis shows USD/JPY sensitivity of 17.1 yen to a 1% change in the Japan-U.S. interest rate differential. Theoretically, if the interest rate differential widens by 1%, USD/JPY would move about 17 yen toward yen weakness.

■Prediction 2: "If a 2% inflation rate is achieved, it will be achieved through cost-push inflation rather than demand-pull inflation" → 60% accuracy rate

The ideal that Abenomics aimed for was for monetary easing to bring about lower unemployment rates, further tighten labor market supply and demand, raise wages, and generate demand-pull inflation centered on expanded consumption and investment. If the output gap had been clearly resolved and gentle price increases based on real demand had continued, Abenomics could have been said to have achieved its ideal goal. However, there is no room for debate that the inflation currently occurring, particularly in Japan, is not this type of demand-pull inflation, but rather "cost-push inflation" based on cost increases from yen weakness exceeding 150 yen.

However, on the other hand, this type of cost-push inflation did not occur at all at USD/JPY levels of 110-120 yen. The original expectation was that if USD/JPY weakened by about 30 yen from the 90 yen level to the 120 yen level, cost-push inflation would occur. However, compared to the 90 yen level, significant cost-push inflation only occurred when yen weakness reached levels of 50-60 yen (around 150 yen). USD/JPY at the 110 yen level was an "adjustment of the overvalued yen" and was not yen weakness severe enough to seriously impact corporate cost structures. Therefore, the prediction accuracy rate can be said to have been 60%.

■Prediction 3: "Wage increases will not occur in Japan, leading to stagflation" → Grading suspended

If cost-push inflation progresses without wage increases, consumption will not expand, investment will be suppressed, and GDP growth may slow. If only inflation progresses while economic activity stagnates, there is a possibility of falling into so-called stagflation (price increases during economic recession). However, at least at present, Japan's economic situation cannot be called stagflation. Nevertheless, it seems premature to judge that this prediction was "incorrect." Nominal wage growth rates remain below inflation rates, and real wages continue to trend flat or decline. The policies of the Trump administration taking office on January 20, 2025, and their impact on financial markets, interest rate trends, and foreign exchange markets remain unpredictable. Depending on these developments, there is sufficient possibility that Japan could fall into stagflation.

■The full post-Abenomics era will begin with the Bank of Japan's next rate hike

Including whether Japan will fall into stagflation, what is extremely important for forecasting economic trends from 2025 onward is when the Bank of Japan will implement rate hikes (including whether it can raise rates at all). And if rate hikes are implemented, how will their impact affect domestic and international economies.

In 2024, the Bank of Japan ended its zero interest rate policy and implemented a 0.25% rate hike. However, the extremely accommodative environment continues unchanged. Yen carry trades are thriving, and Japanese yen continues to provide massive liquidity not only domestically but to global financial markets. The persistent inflation trend despite the U.S. implementing rate hikes at a considerable pace may be influenced, at least to some degree, by yen and Bank of Japan policy. This could be called a phenomenon of "Bank of Japan becoming like the Fed." If this hypothesis is correct, future rate hikes that the Bank of Japan will likely implement may have considerable impact not only on the Japanese economy but also on the U.S. economy.

In subsequent columns, I would like to examine what kind of "post-Abenomics" era will be created by Bank of Japan rate hikes expected in the first half of 2025. Specifically, the impact on large corporations symbolized by "Tokyo Stock Exchange First Section companies," "impact on unlisted small and medium enterprises," and "impact on startups." Additionally, I would like to examine how progressing inflation and Bank of Japan policy will affect "Japanese politics and political situations." Politics and economics are inextricably intertwined, and political considerations are unavoidable when examining Bank of Japan monetary policy in particular. (To be continued)