The story starts out with Brunhilde, a small red fish, going to the shore. She was traveling underwater with her magician father and fellow fish sisters. However, she wanted to see more of the human world and ended up swimming too close to shore. Her body got stuck in a bottle thrown away into the see. A young boy called Sosuke frees Brunhilde and takes her out of the ocean with him in a green bucket. On shore, Sosuke gives Brunhilde the name Ponyo and the two become best friends. Sosuke also promises Ponyo that he will protect her. However, when Ponyo's father realizes that Ponyo is gone, he sends great waves to bring her back, believing that Ponyo has been abducted by humans with evil intentions. Ponyo ends up being taken away from Sosuke.
Ponyo and Sosuke both want to be with each other. By using magic and with the help of her sisters, Ponyo transforms into a young girl and returns to the shore to find Sosuke. Upon finding Sosuke, she is able to stay in Sosuke's house. Both Sosuke and Sosuke's mother, Lisa, recognize Ponyo even in her human form. As the night approaches, the waves start flooding the land. Lisa, who works at a senior home, goes there to see if everything is okay.
Meanwhile, Ponyo's father realizes that Ponyo's transformation has disrupted the balance of the world and now, everyone in it is in danger. He seeks Ponyo's mother, a goddess of the sea, for help. Her mother leaves the question of whether or not Ponyo can stay human in the hands of the two young children, Sosuke and Ponyo.