Global Market: BOJ's Uchida warns AI boom could trigger market correction

Bank of Japan Deputy Governor Shinichi Uchida said the global boom in artificial intelligence may have eased financial conditions by boosting demand and lifting asset prices, but warned that markets could face a correction if expected AI-related profits fail to materialize, Reuters reported.

According to Reuters, Uchida said in a speech published on the Bank of Japan's website on Monday that the rapid adoption of AI had acted as a major positive demand shock, supporting economic activity and putting upward pressure on prices.

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AI could also raise productivity and encourage capital accumulation, potentially influencing a country's natural rate of interest, Uchida said.

The initial impact of the AI boom appeared to have come from the demand side, making financial conditions more accommodative overall, he said. However, a mismatch between elevated asset valuations and the profits ultimately generated by AI-related investments could increase the risk of a market pullback.

Uchida also pointed to a contrasting effect on financial conditions. While rising stock prices linked to AI have helped ease financial conditions, heavy bond issuance by AI-related companies has pushed up long-term interest rates, Reuters reported.

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The BOJ will continue to assess economic and financial data to develop a clearer view of AI's overall impact, Uchida said, adding that it remained difficult to determine how the technology would affect Japan's natural rate of interest.

The BOJ has identified strong AI-related demand as one of the factors that could push underlying inflation above its 2% target, potentially requiring further monetary tightening.

The central bank raised interest rates in June and September as energy costs linked to the Iran war added to inflationary pressures, alongside a weaker yen that has increased the cost of imports.

Japan is heavily dependent on overseas energy supplies and imports almost all of its crude oil. Most of those supplies came from the Middle East before the closure of the Strait of Hormuz, leaving the economy particularly exposed to disruptions in regional energy markets, Reuters reported.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)