BOJ: Global AI demand may cause lasting inflation

The Bank of Japan indicated that global demand for artificial intelligence could exert lasting upward pressure on Japan's inflation, signaling concerns over mounting price risks that might justify a near-term interest rate hike. While AI is generally expected to boost productivity and reduce prices in the long run, the BOJ's quarterly outlook report suggests that in the short term, the inflationary effects of an AI-driven investment boom are likely to outweigh productivity gains. This is due to stronger investment lifting demand and consequently pushing prices higher. The report also noted that global producer prices have risen partly because of oil price increases linked to the Middle East conflict and partly due to a "positive global demand shock" for AI-related goods. The spill-over effects of AI demand are expected to persist, which, combined with the impact of a weaker yen on import costs, could maintain persistent upward pressure on domestic inflation. The BOJ estimates that AI-related demand can have a "sticky and lasting upward influence on consumer inflation excluding fresh food and fuel." The report also examined the impact of higher interest rates on consumption, concluding that Japanese households, with substantial financial assets exceeding their debt, generally benefit from rising rates. The BOJ had previously raised interest rates to a 31-year high of 1% in June and has indicated its readiness to continue increasing borrowing costs to combat inflation driven by a weak yen and energy price shocks.