AI Boom Could Reshape Interest Rates and Economic Policies

Bank of Japan Deputy Governor Shinichi Uchida has highlighted how the artificial intelligence (AI) boom could significantly impact interest rates by altering both demand and supply dynamics. In a recent speech in Tokyo, Uchida noted that AI is acting as a major positive demand shock, pushing up economic activity and prices. Additionally, it may enhance productivity and increase capital investment, thereby influencing the neutral rate of interest, known as r-star.

If AI raises the neutral rate, central banks might need to maintain higher policy rates than previously anticipated to manage inflation without stifling economic growth. Uchida emphasized that discussions about AI, once largely theoretical, have now become a pressing issue for monetary policy. His remarks come amid ongoing debates about whether the recent surge in long-term bond yields reflects a temporary adjustment or a more permanent shift in interest rate expectations.

The implications are particularly significant for Japan, which has struggled with deflation and ultra-low interest rates for decades. On Monday, the benchmark 10-year Japanese government bond (JGB) yield stood at 3.09%, near a three-decade high, while the 30-year yield hit a record 4.235%. Uchida's comments suggest that higher borrowing costs may be a lasting feature of the economic landscape rather than just a phase of policy tightening.

Uchida's speech contributes to a broader discussion on how AI could reshape global capital flows. Rising Japanese government bond yields are reducing the incentive for domestic investors to buy overseas bonds, potentially decreasing demand for US Treasurys. Last week, strategists at ING suggested that AI could account for about one-fifth of the recent rise in long-term bond yields, citing factors like increased borrowing for data centers and expectations of higher productivity and economic growth.