BOJ says AI boom may have eased financial conditions, warns of market risks

By Reuters News

By Leika Kihara

- Bank of Japan Deputy Governor Shinichi Uchida said the global AI boom may have eased financial conditions by stoking demand and boosting asset prices, but warned of the risk of a market pullback if expected profits fail to materialize.

"It is a big positive demand shock, which has put upward pressure on the economy and prices," Uchida said on worldwide AI adoption in the text of a speech on the central bank's website on Monday.

The technology could also raise productivity and enhance capital stock accumulation, which in turn might affect a country's natural rate of interest, he said.

"Tentatively, it appears the demand side has come first and made financial conditions more accommodative on balance," Uchida said.

"But there is a risk of correction if profits do not follow."

While AI has boosted stock prices and made financial conditions easier, huge bond issuance by AI-related firms has put upward pressure on long-term interest rates, Uchida said.

The BOJ will continue to carefully examine economic and financial data to ascertain a "consistent picture" on AI's impact, he said, adding that the overall effect on Japan's natural rate of interest was still hard to gauge.

The BOJ has identified robust AI-related demand as among factors that could push underlying inflation above its 2% target, necessitating further monetary tightening.

The central bank raised interest rates in June and September as the energy shock caused by the Iran war added to price pressures from a weak yen, which increases import costs.

Japan imports almost all of its crude oil, of which most came from the Middle East before the closure of the Strait of Hormuz.

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