BOJ Deputy Governor Warns AI Boom Could Raise Inflation and Rates

Bank of Japan Deputy Governor Shinichi Uchida has highlighted how the surge in artificial intelligence (AI) investment could drive up inflation and long-term interest rates, potentially influencing the neutral interest rate. Speaking in a recent address, Uchida described AI as a "large positive demand shock" that is temporarily boosting economic activity and prices. He noted that while AI may initially elevate demand, it could also enhance productivity and spur capital investment, benefiting the supply side in the long run.

The impact of AI on financial markets is mixed, according to Uchida. On one hand, rising AI demand is pushing up stock prices and easing financial conditions. On the other, large-scale bond issuances by tech companies are increasing long-term yields and tightening financial conditions. These dynamics come as markets closely monitor the Bank of Japan's next rate hike and the eventual peak of its policy rate, which currently stands at 1.25% after a September increase.

Uchida also cautioned that AI could bring significant structural changes to the labor market and productivity. He warned that certain forms of human capital, especially those related to intellectual labor, could quickly become obsolete due to AI advancements. However, he emphasized that the ultimate effects of AI on the natural rate of interest remain uncertain, as the interplay between stronger demand and faster productivity growth could work in opposing directions.