BOJ Warns of Market Risks Amid AI Boom's Financial Impact

Bank of Japan Deputy Governor Shinichi Uchida has highlighted the dual impact of the global AI boom on financial conditions. On one hand, the surge in AI adoption has boosted demand and asset prices, creating a positive shock for the economy and inflation. However, Uchida cautioned that this easing of financial conditions could reverse if the expected profits from AI investments fail to materialize.

Uchida noted that while AI has lifted stock prices, the massive bond issuance by AI-related firms has pushed up long-term interest rates. The Bank of Japan (BOJ) is closely monitoring these developments to understand AI's overall effect on Japan's natural rate of interest, which remains uncertain. The central bank has already raised interest rates twice this year, in June and September, due to inflationary pressures from energy shocks and a weak yen.

The BOJ views robust AI-driven demand as a factor that could push underlying inflation above its 2% target, potentially requiring further monetary tightening. Japan's heavy reliance on imported crude oil, particularly from the Middle East, adds complexity to its economic challenges.