BOJ Warns of Market Risks from AI Boom

Bank of Japan Deputy Governor Shinichi Uchida has cautioned about the potential risks of the global artificial intelligence (AI) boom, warning of a possible market pullback if anticipated profits do not materialize. In a speech published on the central bank's website, Uchida noted that the AI boom has acted as a significant demand shock, boosting economic activity and asset prices. This has, in turn, eased financial conditions by increasing demand and raising productivity.

However, Uchida emphasized the risk of a correction if the expected profits from AI investments fail to materialize. He also highlighted that while AI has driven up stock prices and made financial conditions more accommodative, the massive bond issuance by AI-related firms has pushed long-term interest rates higher. The BOJ will continue to monitor economic and financial data to assess the overall impact of AI on Japan's natural rate of interest.

The central bank has identified robust AI-related demand as one of the factors that could push underlying inflation above its 2% target, potentially necessitating further monetary tightening. The BOJ has already raised interest rates twice this year, in June and September, in response to rising price pressures exacerbated by the Iran war and a weak yen.