Due to their biocompatibility, biodegradability, and suitable mechanical properties, magnesium-based biodegradable implants are emerging as a promising alternative to traditional metal implants. The Mg-4Y-3RE (WE43) biodegradable alloy is among the most extensively studied and widely utilized magnesium alloys in clinical applications. As an absorbable and degradable metallic material, magnesium alloys undergo gradual degradation, wear, and fracture within the body. These alloys reduce the long-term risks associated with permanent implants but generate insoluble byproducts that accumulate in surrounding tissues. Following the implantation of magnesium alloys, granulation tissue and fibrous encapsulation typically form around the material. However, limited research has addressed the interaction between insoluble byproducts of magnesium alloys and macrophages. This study focused on the biological effects of macrophages during the second stage of the host inflammatory response in the degradation process of magnesium alloy. Using subcutaneous implantation of WE43 magnesium alloy sheets, observations were made regarding the degradation components, morphological changes in surrounding tissues, and the biological effects of macrophages upon phagocytosis of insoluble byproducts. The primary degradation products of WE43 in vivo were identified as Ca-3 (PO4)(2), Mg-3(PO4)(2), Na3PO4, NaCa (PO4), MgSO4, MgCO3, NaCl, Mg24Y5, and Mg12YNd. Postimplantation, levels of IL-1 beta and IL-18 in adjacent tissues significantly increased (p < 0.05). By 8 weeks, compared to nitinol alloy, significant thickening of the fibrous capsule (p < 0.05) was observed, accompanied by substantial inflammatory cell infiltration, vascularization, and the presence of macrophages and multinucleated giant cells. Macrophages were observed extending pseudopodia to enclose and phagocytose particles, forming phagosomes and creating a relatively isolated microenvironment around the engulfed substances, where further particle degradation occurred. Following the phagocytosis of degradation products, macrophages exhibited increased lysosome numbers, mitochondrial swelling and damage, phagolysosome formation, and autophagosome development. Furthermore, the degradation products were observed to induce elevated reactive oxygen species (ROS) production in macrophages, activation of P2X7 receptors, enhanced IL-6 secretion, endoplasmic reticulum stress, autophagy, and activation of the NLRP3 inflammasome pathway. This study provides novel insights and contributes a theoretical foundation for a more comprehensive understanding of magnesium alloy degradation in vivo.