The shift is particularly visible in monetary policy and the labour market.
The Bank of Japan (BoJ) raised its interest rate on 18 September from 1 percent to 1.25 percent, its highest level since 1995.
A few years ago, the BoJ's main challenge was deflation and reaching its 2 percent inflation target. The BoJ had maintained negative interest rates for years.
The labour market shows the change particularly clearly. During this year's shuntō, Japan's annual coordinated wage negotiations, companies agreed to average wage increases of 5.01 percent.
This is the third consecutive year in which average wage increases have exceeded 5 percent.
PIE says wage growth is becoming more persistent, while companies are increasingly able to pass higher labour costs on to consumers through higher prices.
Another source of inflation is imported energy. Japan's energy self-sufficiency rate is only 16.4 percent, putting it among the developed countries most dependent on imported energy.
“Japan imports 99.7 percent of the oil it consumes, while around 95 percent of its oil supplies came from the Middle East in 2024. The largest suppliers were the United Arab Emirates and Saudi Arabia. This makes the economy highly vulnerable to the ongoing conflict in the Middle East,” PIE said.
PIE also points to the weak yen as a source of price pressure. Despite the rate increase, the yen remains at around 157 yen to the US dollar, or around EUR 0.88.
Japanese authorities have also sought to limit yen depreciation through currency-market interventions, using more than JPY 27 trillion (EUR 151.2 billion) in two interventions this year. At the end of July, they coordinated action with the US.
According to PIE, the shift has been partly driven by external factors, including higher energy and commodity prices and the weaker yen, while domestic factors include labour shortages, faster wage growth and companies becoming more willing to raise prices.
“The key question is whether the BoJ can manage this transition without weakening growth or triggering a sharp unwinding of yen-funded positions,” PIE economists said.
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Source: PAP