Japan's Return to Inflation: A Structural Shift with Global Implications

The yen's weakness has become a global concern, but for Japan, it may be good news. After three decades of deflation, Japan is finally experiencing inflation, and it's not just a cyclical blip.

Taro Kimura, Bloomberg's senior economist in Tokyo, explains that the 'lost three decades' began with the early-1990s asset price bubble collapse, which led to a banking crisis, corporate retrenchment, and a labor market equilibrium where unions stopped requesting higher wages. This changed when the Russia-Ukraine war drove up energy costs, forcing Japanese corporates to raise prices.

Now, for the first time in decades, unions are requesting - and winning - higher wages, creating a self-sustaining inflation loop.

The return of inflation is structurally driven by wage-price dynamics. Japan's normalization is real, but its fiscal ambitions, central bank caution, and structural capital outflows have created a fragile equilibrium that global markets are still learning to price.