BOJ Warns of Market Risks Amid AI-Driven Financial Ease

Bank of Japan Deputy Governor Shinichi Uchida has highlighted the dual impact of the global AI boom on financial conditions. In a speech posted on the central bank's website, Uchida noted that AI-driven demand has made financial conditions more accommodative, boosting asset prices and economic activity. However, he cautioned that markets could face a correction if the anticipated profits from AI investments do not materialize.

Uchida described the AI boom as a significant positive demand shock, exerting upward pressure on both the economy and prices. He also pointed out that AI could enhance productivity and capital stock accumulation, potentially influencing a country's natural rate of interest. Despite these benefits, he warned that the massive bond issuance by AI-related firms has contributed to higher long-term interest rates.

The Bank of Japan is closely monitoring these developments to assess the overall impact of AI on Japan's economy. Uchida emphasized that while robust AI-related demand could push underlying inflation above the 2% target, the effect on the natural rate of interest remains uncertain. The BOJ has already raised interest rates twice this year in response to inflationary pressures, including those arising from the Iran war and a weak yen.