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BOJ Deputy Governor Says AI Demand Surge May Push Up Inflation, Long-Term Yields and Neutral Rate
Summary
- The Bank of Japan said a surge in demand driven by expanded AI investment is pushing up prices and long-term interest rates and could also affect the neutral rate.
- It said rising AI demand is lifting stock prices and easing financial conditions, while large-scale bond issuance by technology companies is tightening financial conditions through higher long-term interest rates.
- Markets are watching whether the Bank of Japan will follow its September policy rate hike to 1.25% with an additional rate increase later this year.
Forecast Trend Report by Period
A surge in demand driven by increased investment in artificial intelligence is pushing up prices and long-term interest rates and could also affect the future level of the neutral rate, the Bank of Japan said.
BOJ Deputy Governor Shinichi Uchida said in a speech on Oct. 5 that the spread of AI represents “a large positive demand shock that initially puts upward pressure on the economy and prices,” Bloomberg reported. He added that AI could also support the supply side by raising productivity and encouraging capital accumulation, which may affect the natural rate of interest, or r-star.
The natural rate refers to the level of interest rates that neither stimulates nor restrains the economy after stripping out the effects of inflation. The nominal neutral rate adds inflation to that measure. Uchida’s remarks suggest the spread of AI could, at least in the short term, lift demand and put upward pressure on central banks’ neutral rates.
Expanded AI investment is also having mixed effects on financial markets. Rising AI demand is lifting stock prices and easing financial conditions, while large bond issuance by technology companies is pushing up long-term yields and tightening financial conditions.
Uchida said AI could also bring structural changes to the labor market and productivity over the longer term. “AI may rapidly make certain forms of human capital obsolete, particularly technologies developed for intellectual labor,” he said. The benefits of AI may also vary depending on people’s ability to use and adapt to the technology, with implications for social inequality.
Still, Uchida said it was too early to judge AI’s ultimate effect on the natural rate. Demand growth and productivity gains could work in different directions and “we do not yet have a clear answer,” he said.
The remarks come as markets watch for the timing of the BOJ’s next rate increase and the eventual peak in policy rates. The BOJ raised its policy rate to 1.25% in September, and markets are focused on the possibility of another increase later this year.
