BOJ Warns AI Boom Could Spark Market Correction

Bank of Japan Deputy Governor Shinichi Uchida has cautioned that while the global AI boom is currently supporting economic activity and lifting asset prices, it could also trigger a market correction if the expected profits from AI-related investments fail to materialize. In a speech published on the Bank of Japan's website, Uchida noted that the rapid adoption of AI has acted as a major positive demand shock, boosting economic activity and putting upward pressure on prices.

Uchida highlighted that AI could raise productivity and encourage capital accumulation, potentially influencing a country's natural rate of interest. He also pointed out that the initial impact of the AI boom has been on the demand side, making financial conditions more accommodative overall. However, a mismatch between elevated asset valuations and the actual profits generated by AI-related investments could increase the risk of a market pullback.

Uchida also noted a contrasting effect on financial conditions. While rising stock prices linked to AI have helped ease financial conditions, heavy bond issuance by AI-related companies has pushed up long-term interest rates. The Bank of Japan will continue to assess economic and financial data to develop a clearer view of AI's overall impact, though it remains difficult to determine how the technology will affect Japan's natural rate of interest.

The BOJ has identified strong AI-related demand as one of the factors that could push underlying inflation above its 2% target, potentially requiring further monetary tightening. The central bank raised interest rates in June and September as energy costs linked to the Iran war added to inflationary pressures, alongside a weaker yen that has increased the cost of imports.