BOJ Deputy Governor Warns AI Boom Could Push Up Long-Term Interest Rates

Bank of Japan (BOJ) Deputy Governor Shinichi Uchida highlighted how the artificial intelligence (AI) investment boom is driving economic growth and inflation through a "large-scale positive demand shock." He noted that AI adoption could also influence the neutral interest rate (r-star) by boosting productivity and capital accumulation. Uchida suggested that central banks worldwide may need to reassess their terminal rate expectations as AI adoption progresses.

Uchida explained that AI's impact is twofold: initially pushing up demand and prices, and later enhancing productivity and capital stock. These supply-side effects could alter the neutral rate, though the long-term direction remains uncertain. He cautioned that while AI is pushing stock prices higher and making financial conditions more accommodative, it is also raising long-term yields due to increased bond issuance by tech firms.

The BOJ's recent policy rate hike to 1.25% in September has sparked debate among policymakers. Some argue for accelerating rate hikes, while others warn of weak consumption and sluggish services inflation. The latest Tankan survey showed strong manufacturer sentiment, and Tokyo's core consumer price index (CPI) surged to 2.7% in September, reinforcing expectations of further rate hikes.

Uchida's remarks come as markets watch for clues on the BOJ's next move. While he did not specify timing, his analysis underscores how AI-driven demand and inflation are reshaping central bank strategies. The structural changes from AI adoption will likely play a key role in determining future interest rate policies.