The inflationary impulse is now led by durable domestic forces – namely historically tight labor markets and sustained wage gains. The Bank of Japan’s (BoJ) gradual normalization has lifted short-term rates, while long-term yields have risen more sharply as markets reassess Japan’s new inflation regime.

State Street PriceStats signals were early in detecting an inflationary rise in Japan. Currently, these signals indicate online goods price inflation decelerating and running below its long-run seasonal trend, indicating that cost-push inflation is fading despite a weak yen. This cooling of high frequency prices suggests that future inflation momentum will depend increasingly on wage-driven services, not necessarily foreign exchange (FX) pass-through. At the same time, State Street positioning metrics show that international asset managers remain neutral in the yen and carry trades, reducing near-term risk of a disorderly unwind should Japanese yields rise or the currency rebound more forcefully. While higher Japanese inflation, rates and yields would have far-reaching global consequences, risk of Japanese investors reversing their net purchases seems largely hypothetical for now.

Over the next 12–18 months, BoJ policy decisions, wage dynamics and fiscal signals – alongside real-time inflation indicators – will be essential in gauging whether Japan’s reflation stabilizes or accelerates into a disruptive global market event.