BOJ Sounds Alarm Over Sticky Inflationary Effect of Global AI Demand

The Bank of Japan (BOJ) has warned that global demand for artificial intelligence (AI) could have a lasting, sticky effect on inflation in Japan. According to the BOJ's quarterly outlook report, AI-related demand is boosting producer prices globally and contributing to upward pressure on domestic inflation.

In the short term, the BOJ expects the inflationary effects of an AI-driven investment boom to outweigh productivity gains, as stronger investment lifts demand and generates price increases. However, in the medium to long term, the BOJ believes that AI should boost productivity and put downward pressure on prices as workers and firms adapt to its use.

The BOJ also examined the impact of higher interest rates on consumption, finding that Japanese households benefit from higher interest rates due to their substantial financial assets. The report noted that household deposits exceed outstanding borrowing by a wide margin, making them less vulnerable to rate hikes.

The BOJ has already raised interest rates to a 31-year high of 1% in June and has signaled its readiness to keep pushing up borrowing costs to combat mounting price pressures from a weak yen and the energy shock caused by the Iran war. The next rate hike will depend on how producer prices spread to consumer inflation and the impact of past rate hikes on the economy.