Inflation Is Reshaping Japan’s Economy After Three Decades of Price Stagnation

Photo: Unsplash

One of the most significant shifts in decades has taken place in Japan’s economy. The country, which for a long time lived under conditions of near-total price stability, has faced persistent inflation, reports Bloomberg. These changes are affecting not only consumer behaviour and corporate strategies. They have become a serious challenge for the new prime minister, Sanae Takaichi, and a factor that could determine her political future.

Key indicators

For thirty years, price levels in Japan barely changed. Any increase was seen as an exceptional event. In 2016, one Japanese company publicly apologised to customers for raising the price of a popular ice cream by ten yen, or about 6 cents. This inertia became part of the country’s economic identity and the result of many years of demand-stimulating policies.

The situation has changed radically. The key inflation indicator has exceeded the Bank of Japan’s 2% target for 44 consecutive months. At the same time, the yen has weakened to its lowest levels since the early 1990s. For an economy accustomed to deflationary risks and weak domestic demand, this marks a transition to a fundamentally new reality.

Rate hike

For a long time, inflation was seen by Japanese authorities as a desirable outcome. The Bank of Japan kept interest rates at extremely low levels, and in some periods they even moved into negative territory. It was assumed that moderate price increases would trigger a “healthy cycle” — rising wages, expanding consumption, and a revival in business activity. However, the actual dynamics turned out to be different.

At the end of 2025, the Bank of Japan’s Policy Board unanimously raised the key rate by 25 basis points to 0.75%, the highest level since 1995. The regulator pointed to steady wage dynamics and a reduction in external risks linked to US trade tariffs, and also noted a moderate acceleration in core inflation.

Bank of Japan Governor Kazuo Ueda said the rate-hiking cycle is not over, and further decisions will be made at each meeting individually, based on actual economic conditions and price dynamics. He estimated the neutral rate in the range of 1–2.5%, stressing that even after the latest increase, policy remains accommodative.

Markets reacted cautiously: the yen weakened past 157 per dollar, while the yield on 10-year government bonds rose above 2%, reaching its highest level since 1999. This reaction reflects investor expectations that the Bank of Japan will move toward tightening policy rather carefully.

Consequences of rising prices

Real household incomes have remained under pressure since the beginning of last year. This means wages are not keeping pace with price increases, and purchasing power is declining. As a result, inflation is not translating into stronger consumption, but instead is reinforcing a sense of economic instability.

Higher prices are affecting both households and businesses. Consumers face rising costs for everyday goods and services, while companies are dealing with higher expenses for raw materials, energy, and logistics. At the same time, the ability to pass these costs on to end consumers is limited, as the market remains highly sensitive to any price changes.

The economic impact has already moved into the political sphere. In the latest national elections, the ruling Liberal Democratic Party lost some support amid voter dissatisfaction with living standards. Inflation has become one of the key topics in public debate and a factor shaping electoral behaviour.

Prime Minister Sanae Takaichi is considering calling snap elections in the coming months in an effort to regain a parliamentary majority. However, the future of her government will directly depend on how effectively it manages to stabilise the price situation and restore public confidence.

Analysts at International Investment note that inflation in Japan has ceased to be an abstract macroeconomic concept and has turned into a systemic factor influencing everyday life, central bank strategy, and the stability of political power. For a country that lived for decades in conditions of price inertia, this marks a transition to a fundamentally new economic era.