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

Bank of Japan (BOJ) deputy governor Shinichi Uchida has highlighted the dual impact of the global AI boom on financial conditions. In an Oct 5 speech, Uchida noted that AI adoption has acted as a significant demand shock, driving economic growth and inflation while also easing financial conditions. He described AI as a "big positive demand shock," emphasizing its role in boosting asset prices and productivity.

However, Uchida cautioned that the current market optimism could reverse if AI-related profits fail to materialize. He pointed out that while AI has supported stock prices, it has also led to increased bond issuance by AI firms, pushing up long-term interest rates. The BOJ remains vigilant, closely monitoring economic and financial data to assess AI's long-term effects on Japan's natural interest rate.

The central bank has identified AI-driven demand as a factor that could push inflation above its 2% target, potentially necessitating further monetary tightening. The BOJ has already raised interest rates twice this year, in June and September, responding to price pressures from a weak yen and the energy shock triggered by the Iran war.