Bank of Japan Deputy Governor Shinichi Uchida said on Monday that the global surge in artificial intelligence adoption has acted as a significant demand shock, lifting economic activity and asset prices while easing financial conditions overall. He cautioned that this support could reverse sharply if anticipated corporate profits fail to materialize.

Uchida noted that AI technologies are already boosting stock valuations and lowering financing costs for many firms, but highlighted that large-scale bond issuances by AI-focused companies have pushed long-term interest rates higher. "Tentatively, it appears the demand side has come first and made financial conditions more accommodative on balance," he said in a speech posted on the central bank’s website.

The deputy governor added that AI could enhance productivity and expand capital stock, potentially influencing a nation’s natural rate of interest. However, he stressed that the full impact on Japan’s economy remains uncertain and requires continued monitoring of economic and financial data.

The BOJ has identified robust AI-related demand as a factor that could drive underlying inflation above its 2% target, which might prompt further monetary tightening. The central bank raised interest rates in June and September, citing energy price pressures from geopolitical tensions and a weak yen that increases import costs for a country heavily reliant on imported crude oil.

Uchida emphasized that the BOJ will maintain a careful, data-driven approach to assess AI’s evolving role in the economy, acknowledging both its potential benefits and the risks of market instability if profit expectations are not met.