TOKYO, Aug 3 — The Bank of Japan (BOJ) has indicated that global demand for artificial intelligence (AI) technologies could exert a lasting upward pressure on Japan's inflation, raising concerns about persistent inflation risks that may justify a near-term increase in interest rates.

While AI is expected to enhance productivity and reduce prices over the medium to long term as businesses and workers adjust, the BOJ's quarterly outlook report highlights that in the short term, inflationary effects from an AI-driven investment surge are likely to surpass productivity gains. This is due to increased demand from stronger investment, which generates upward price pressures.

Producer prices worldwide have risen partly because of the oil price increases linked to the Middle East conflict and partly due to a "positive global demand shock" for AI-related goods. The report notes that the spill-over effects of AI demand, combined with higher import costs from a depreciated yen, could sustain upward pressure on domestic inflation.

"Our estimates suggest that AI-related demand can exert a sticky and lasting upward influence on consumer inflation excluding fresh food and fuel," the BOJ stated.

Japanese households hold approximately 2,400 trillion yen (about $15 trillion) in financial assets, with deposits accounting for around 1,000 trillion yen. Their debt is relatively modest at about 400 trillion yen, over half of which consists of mortgage loans. The report adds that since household deposits substantially exceed outstanding borrowings, Japanese households overall benefit from higher interest rates.

In June, the BOJ raised interest rates to a 31-year high of 1 percent and has indicated readiness to continue increasing borrowing costs to counteract mounting price pressures stemming from the weak yen and energy shocks caused by the Iran war.

Sources