BOJ says AI boom may have eased financial conditions, warns of market risks

Bank of Japan Deputy Governor Shinichi Uchida said the global AI boom may have eased financial conditions by stoking demand and boosting asset prices, but warned of the risk of a market pullback if expected profits fail to materialize.

"It is a big positive demand shock, which has put upward pressure on the economy and prices," Uchida said on worldwide AI adoption in the text of a speech on the central bank's website on Monday.

The technology could also raise productivity and enhance capital stock accumulation, which in turn might affect a country's natural rate of interest, he said.


"Tentatively, it appears the demand side has come first and made financial conditions more accommodative on balance," Uchida said.

"But there is a risk of correction if profits do not follow."

While AI has boosted stock prices and made financial conditions easier, huge bond issuance by AI-related firms has put upward pressure on long-term interest rates, Uchida said.

The BOJ will continue to carefully examine economic and financial data to ascertain a "consistent picture" on AI's impact, he said, adding that the overall effect on Japan's natural rate of interest was still hard to gauge.

The BOJ has identified robust AI-related demand as among factors that could push underlying inflation above its 2% target, necessitating further monetary tightening.

The central bank raised interest rates in June and September as the energy shock caused by the Iran war added to price pressures from a weak yen, which increases import costs.

Japan imports almost all of its crude oil, of which most came from the Middle East before the closure of the Strait of Hormuz.