The global artificial intelligence boom may have eased financial conditions by increasing demand and pushing up asset prices, but markets could face a correction if expected AI-related profits fail to materialise, Bank of Japan (BOJ) Deputy Governor Shinichi Uchida has warned.
Speaking about the global adoption of AI in a speech published on the central bank’s website on October 5, Uchida said the technology has created a strong demand shock that has contributed to higher economic activity and prices.
“It is a big positive demand shock, which has put upward pressure on the economy and prices,” Uchida said.
Uchida said AI could also raise productivity and increase capital stock accumulation. These changes could influence a country’s natural rate of interest, although the overall impact remains uncertain.
“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.”
The BOJ deputy governor noted that the AI boom has contributed to higher stock prices and easier financial conditions. At the same time, large-scale bond issuance by companies involved in AI has increased pressure on long-term interest rates.
The contrasting effects make it difficult to determine the broader impact of AI on financial conditions and interest rates. Uchida said the BOJ would continue examining economic and financial data to develop a “consistent picture” of AI’s impact.
He also said the overall effect of AI on Japan’s natural rate of interest remains difficult to assess.
AI-driven demand has become one of the factors the BOJ is monitoring because stronger demand related to the technology could contribute to underlying inflation moving above the central bank’s 2% target. Such pressure could require further monetary tightening.
The BOJ raised interest rates in June and September as Japan faced additional price pressures linked to the energy shock caused by the Iran war and a weaker yen, which has increased import costs.
Japan imports almost all of its crude oil, with most of its supplies previously coming from the Middle East before the closure of the Strait of Hormuz.
Uchida’s comments come as policymakers and investors continue to assess the economic impact of the rapid expansion in AI investment. The technology could support productivity and investment over the longer term, but the financial impact could change if the earnings expected from AI-related investments do not materialise.
For the BOJ, the effect of AI is therefore not limited to financial markets. Its impact on demand, prices, productivity, capital accumulation and the natural rate of interest could also influence the direction of monetary policy.
Uchida said the central bank would continue to assess these effects using economic and financial data, while acknowledging that the overall impact on Japan’s natural rate of interest remains uncertain.
