Bank of Japan Deputy Governor Shinichi Uchida said the global AI boom may have eased financial conditions by boosting demand and pushing up asset prices, but warned that markets could face a sharp pullback if expected profits fail to materialise, Reuters reported, citing the text of a speech published on the central bank’s website Monday.
A Positive Shock, With a Catch
It is a big positive demand shock, which has put upward pressure on the economy and prices, Uchida said, referring to AI adoption worldwide. He added that the technology could also raise productivity and boost capital stock accumulation, which in turn might influence a country’s natural rate of interest.
Tentatively, it appears the demand side has come first and made financial conditions more accommodative on balance, Uchida said. But there may be a risk of correction if profits do not follow.
Easier Money, But Rising Bond Pressure
While AI has lifted stock prices and loosened financial conditions overall, Uchida noted a competing effect: heavy bond issuance by AI-related companies has put upward pressure on long-term interest rates.
The BOJ said it will keep closely examining economic and financial data to build a consistent picture of AI’s broader impact, with Uchida adding that the overall effect on Japan’s natural rate of interest remains difficult to gauge at this stage.
Why This Matters for Interest Rates
The central bank has identified strong AI-related demand as one of the factors that could push underlying inflation above its 2% target, a dynamic that may require further monetary tightening going forward.
The BOJ already raised interest rates twice this year, in June and September, as an energy shock stemming from the Iran war added to price pressures already building from a weak yen, which raises the cost of imports. Japan imports nearly all of its crude oil, most of which came from the Middle East before the closure of the Strait of Hormuz.
