BOJ Warns AI Boom Could Trigger Sharp Market Correction

Shinichi Uchida, deputy governor of the Bank of Japan, highlighted how the AI boom is making money more accessible by driving up stock prices. This surge in equity values is creating easier financial conditions, as investors feel wealthier and lenders take on more risk. However, Uchida cautioned that heavy borrowing by AI-related firms could push long-term interest rates higher, counteracting the loosening effect of rising stock prices.

The core concern revolves around corporate profits. Uchida warned that if earnings growth does not match the current stock price valuations, a sharp correction could occur. This would tighten financial conditions quickly, reversing the temporary ease brought by higher asset prices. The BOJ is monitoring this closely, as easier conditions could sustain higher spending and price pressures.

Uchida noted that AI could eventually boost productivity and influence the economy’s natural interest rate. However, the central bank remains uncertain about the net impact and will rely on incoming data to guide its decisions. The broader lesson from this situation mirrors the dot-com era: new technologies often drive market excitement first, with profits lagging behind, creating fragile conditions in the short term.