Uchida: AI demand shock lifts prices, warns of correction

Uchida characterises artificial intelligence as an inflationary demand shock that has eased financial conditions, a view that tilts hawkish. The argument implies the Bank of Japan still has further tightening ahead, though no specific timing was given. This interpretation supports the yen to some extent and maintains expectations for additional BOJ rate increases. His observation that bond issuance tied to AI is driving up long-term yields offers a fresh, non-monetary reason for the strain on global bond markets, including Japanese government bonds. The caution that a correction may occur if earnings fail to materialise serves as a reminder that the BOJ monitors equity valuations, meaning an AI-triggered selloff could directly influence its evaluation of financial conditions.

The central bank views AI as initially a demand surge with productivity benefits arriving only later, implying higher inflation in the near term and a risk of correction if corporate profits do not eventually appear.

• BOJ Deputy Governor Uchida stated that AI has acted as a substantial positive demand shock, exerting upward pressure on economic activity and inflation.
• He noted that AI is a major subject at BOJ policy deliberations, affecting the output gap, financial conditions, and benchmark variables including the neutral interest rate.
• AI has lifted equity markets and relaxed monetary conditions, while substantial bond issuance by AI firms has raised long-term interest rates.
• His preliminary assessment is that demand-side effects have preceded, resulting in generally looser financial conditions, with a downside risk if earnings do not materialise.
• Over the longer horizon, AI could boost productivity and expand capital stock, with varied consequences for employment markets.

Deputy Governor Uchida remarked that artificial intelligence has thus far functioned as a major positive demand shock, boosting economic activity and prices. He added that it has also relaxed financial conditions in a manner that poses a correction danger should corporate earnings not match the investment.

Speaking on Sunday, Uchida indicated that AI has become a central discussion point among central banks, including during the BOJ's own policy sessions. The technology influences several fundamental parameters of monetary policy, such as the output gap, financial conditions, and what are known as star variables. These are unobservable metrics like the neutral rate of interest that policymakers employ to determine whether policy is restrictive or accommodative.

Regarding demand, Uchida stated that AI investment has intensified economic and price pressures. Over time, it may also influence supply positively by enhancing productivity and speeding up capital stock formation. He further noted that AI adoption could generate both beneficial and adverse effects on productivity and labour markets.

Uchida pointed out two countervailing influences in financial markets. AI has raised share prices, easing monetary conditions, while substantial bond issuance by AI-linked firms has driven up long-term interest rates.

His preliminary conclusion is that the demand-side effect has emerged first, making financial conditions broadly more accommodative. He cautioned, though, that a market correction could happen if profits do not catch up with the investment surge. Uchida stated that the BOJ will keep scrutinising economic and financial data to develop a coherent understanding of AI's impacts.

Uchida offered no direct remarks on the short-term direction of interest rates. His characterisation of AI as an inflationary demand shock that has relaxed financial conditions does not constitute an explicit policy cue. However, it aligns with a central bank that sees grounds for continued tightening while remaining watchful for a market downturn if the AI investment cycle underperforms.