Bank of Japan Warns of AI Boom Risks Despite Financial Easing

Bank of Japan Deputy Governor Shinichi Uchida highlighted the dual impact of the global artificial intelligence (AI) boom on financial conditions. On one hand, the surge in AI adoption has acted as a significant demand shock, boosting economic activity and asset prices. This has made financial conditions more accommodative, according to Uchida's speech posted on the central bank’s website on Monday.

Uchida cautioned, however, that this positive trend carries risks. If the expected profits from AI investments do not materialize, markets could face a sharp correction. He also noted that while AI has driven up stock prices, the massive bond issuance by AI-related firms has pushed long-term interest rates higher.

The Bank of Japan (BOJ) is closely monitoring the situation to assess the overall impact of AI on Japan's natural rate of interest. The central bank has already identified robust AI-related demand as a factor that could push underlying inflation above its 2% target, potentially necessitating further monetary tightening. The BOJ raised interest rates in June and September in response to rising price pressures, including those from a weak yen and the energy shock caused by the Iran war.

Japan's heavy reliance on imported crude oil, much of which historically came from the Middle East, adds another layer of complexity to the economic landscape. The closure of the Strait of Hormuz has further strained the country's energy supply chains.