Uchida describes AI as an inflationary demand shock that has loosened financial conditions, which leans hawkish. It argues that the BOJ’s tightening has more to do, without signalling a timetable. That supports the yen at the margin and keeps further BOJ hike expectations intact. His point that AI-related bond supply is pushing up long-term yields adds a new, non-monetary explanation for the pressure on global bond markets, including JGBs. The warning about a correction if profits don’t follow is a reminder that the central bank is watching equity valuations, so any AI-led selloff could feed straight into its assessment of financial conditions.
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The BOJ sees AI as a demand boom first and a productivity story later, which means more inflation now and a correction risk if the profits never arrive.
Summary:
- BOJ Deputy Governor Uchida said AI has been a big positive demand shock, putting upward pressure on the economy and prices.
- He said AI is a key topic at BOJ policy meetings, with implications for the output gap, financial conditions and star variables such as the neutral rate.
- AI has boosted stocks and eased financial conditions, while heavy AI-related bond issuance has pushed up long-term rates.
- His tentative view is that demand effects came first, leaving conditions more accommodative on balance, with a correction risk if profits don’t follow.
- Longer term, AI could lift productivity and capital stock, with mixed effects on labour markets.
Bank of Japan Deputy Governor Uchida said artificial intelligence has so far acted as a large positive demand shock, putting upward pressure on economic activity and prices. It has also eased financial conditions in a way that carries the risk of a correction if corporate profits fail to keep pace, he said.
Speaking on Sunday, Uchida said AI has become a key topic among central banks, including at the BOJ’s own policy meetings. He said the technology has implications for some of the core parameters of monetary policymaking, including the output gap, financial conditions and so-called star variables. These are the unobservable benchmarks, such as the neutral interest rate, that policymakers use to judge whether policy is tight or loose.
On the demand side, Uchida said AI investment has added to pressure on the economy and prices. Over time it could also affect supply, potentially in a positive way, by raising productivity and accelerating the build-up of capital stock. He added that AI adoption may have both positive and negative effects on productivity and labour markets.
Uchida highlighted two opposing forces in financial markets. AI has lifted stock prices, which has loosened financial conditions, while heavy bond issuance by AI-related companies has pushed up long-term interest rates.
His tentative assessment is that the demand-side impact has come first, leaving financial conditions more accommodative on balance. He warned, however, that a correction is possible if profits do not follow the investment boom. He said the BOJ will continue to examine economic and financial data closely to build a consistent picture of AI’s effects.
Uchida did not comment directly on the near-term path for interest rates. His framing of AI as an inflationary demand shock that has eased financial conditions is not a direct policy signal. It is nonetheless consistent with a central bank that sees reasons to keep tightening, while staying alert to the risk of a market setback if the AI investment cycle disappoints.
This article was written by Eamonn Sheridan at investinglive.com.