Deputy Governor Shinichi Uchida said artificial intelligence is boosting demand and loosening financial conditions before any productivity gains arrive. Japan's services firms are raising prices at one of the fastest rates on record.
The usual case for artificial intelligence in central banking is that it lowers inflation by raising productivity. The Bank of Japan's deputy governor offered a different sequence on Monday.
AI "has implications for some core parameters of monetary policymaking, including the output gap, financial conditions, and star variables," Deputy Governor Shinichi Uchida said in a speech. "First, it is a big positive demand shock."
The point is about timing. Investment in data centers, chips and power infrastructure adds to spending today, while the productivity payoff, if it comes, arrives later. In the interim, the effect on the economy looks inflationary rather than disinflationary.
Two channels, pulling in different directions
Uchida described two ways AI is already reaching financial conditions. Equity gains tied to AI have eased conditions by raising household and corporate wealth. At the same time, heavy bond issuance by companies funding AI investment has pushed long-term yields higher, tightening conditions at the far end of the curve.
He also warned that a correction is possible if AI profits disappoint, which would reverse the easing that equity gains have provided. On the neutral rate, the level of interest rates that neither stimulates nor restrains the economy, he was candid. "We do not yet have a clear answer," he said.
The data backdrop
Japan's services sector supports the demand reading. The final services purchasing managers' index for September came in at 51.3, below the flash estimate of 51.6 and August's 52.5, but still in expansion. More striking, firms raised selling prices at one of the sharpest rates on record.
The Bank of Japan raised its policy rate to 1.25% in September. Uchida's framing gives the board a rationale for continuing to tighten even if growth slows, because a demand shock that lifts prices argues for higher rates regardless of where activity indicators settle.
What the market did
Tokyo stocks rallied, though not on the speech. The Nikkei 225 rose 2.40% to 69,946.86, led by AI-linked technology names following Friday's U.S. session, while the broader Topix gained about 1.2%. The yen was little changed near 157.82 per dollar.
The gap between the two indexes illustrates Uchida's correction risk. A market in which the AI-weighted benchmark rises twice as fast as the broad one is a market whose wealth effect depends heavily on a single theme.
Two interpretations for the next meeting
One reading is that the speech prepares the ground for further hikes: if AI lifts the neutral rate, current policy is looser than it looks. The other is that the effects are too uncertain and too reversible to anchor policy on, which argues for patience. Uchida's own admission that the neutral-rate question is unresolved leaves room for both.
What to watch: Tokyo consumer price data and services price indexes before the Bank of Japan's meeting later this month. Continued strength in services prices would make the demand-shock framing harder to dismiss.