Bank of Japan Warns AI Demand Could Drive Sticky Inflation, Signals Potential Rate Hikes

BOJ says global AI demand could have sticky inflationary effect

TOKYO, Aug 3 (Reuters) - Global AI-related demand may exert lasting upward pressure on Japan's inflation, the Bank of Japan said on Monday, signalling its alarm over mounting inflation risks that could boost the case for a near-term interest rate hike. Artificial intelligence should boost productivity and put downward pressure on prices over the medium to long term, as workers and firms adapt to its use, the BOJ said. "In the short term, however, the inflationary effects of an AI-driven investment boom are likely to outweigh productivity gains, as stronger investment lifts demand and generates ⁠upward pressure on prices," it said in a full version of its quarterly outlook report. Producer prices have risen across the world in part because of the oil price rise caused by the Middle East conflict and in part because of a "positive global demand shock" for AI-related goods, it said. The spill-over effects of AI demand will remain in place for some time which, coupled with the lingering boost to import costs from yen declines, could keep persistent upward pressure on domestic inflation, the report said. "Our estimates suggest that AI-related demand can exert a sticky and lasting upward influence on consumer inflation excluding fresh food and fuel," it said. RATE-HIKE PAIN IS LIMITED In the ⁠report, the BOJ also examined the impact of higher interest rates on consumption. Japanese households hold roughly 2,400 trillion yen ($15 trillion) in financial assets, of which deposits account for around 1,000 trillion yen, the report said. Their debt is relatively modest at around 400 trillion yen with more than half consisting of mortgage loans, it said. "As the total volume of household ⁠deposits substantially exceeds outstanding borrowing, Japanese households as a whole benefit from higher interest rates," the report said. The BOJ raised interest rates to a 31-year high of 1% in June and has signalled its readiness to keep pushing up borrowing costs ⁠to combat mounting price pressures from a weak yen and the energy shock caused by the Iran war. In timing the next rate hike, the BOJ has said it will scrutinise how the spike in producer ⁠prices could spread to consumer inflation, and the impact of its past rate hikes on the economy. The BOJ releases a summary of its quarterly outlook report on the day it concludes its policy meeting, and a full version the following market day. ($1 = 156.5500 yen) Reporting by Leika Kihara; editing by Barbara Lewis Our Standards: The Thomson Reuters Trust Principles., opens new tab

BOJ says global AI demand could have sticky inflationary effect

TOKYO, Aug 3 (Reuters) - Global AI-related demand may exert lasting upward pressure on Japan's inflation, the Bank of Japan said on Monday, signalling its alarm over mounting inflation risks that could boost the case for a near-term interest rate hike. Artificial intelligence should boost productivity and put downward pressure on prices over the medium to long term, as workers and firms adapt to its use, the BOJ said. "In the short term, however, the inflationary effects of an AI-driven investment boom are likely to outweigh productivity gains, as stronger investment lifts demand and generates upward pressure on prices," it said in a full version of its quarterly outlook report. Producer prices have risen across the world in part because of the oil price rise caused by the Middle East conflict and in part because of a "positive global demand shock" for AI-related goods, it said. The spill-over effects of AI demand will remain in place for some time which, coupled with the lingering boost to import costs from yen declines, could keep persistent upward pressure on domestic inflation, the report said. "Our estimates suggest that AI-related demand can exert a sticky and lasting upward influence on consumer inflation excluding fresh food and fuel," it said. RATE-HIKE PAIN IS LIMITED In the report, the BOJ also examined the impact of higher interest rates on consumption. Japanese households hold roughly 2,400 trillion yen ($15 trillion) in financial assets, of which deposits account for around 1,000 trillion yen, the report said. Their debt is relatively modest at around 400 trillion yen with more than half consisting of mortgage loans, it said. "As the total volume of household deposits substantially exceeds outstanding borrowing, Japanese households as a whole benefit from higher interest rates," the report said. The BOJ raised interest rates to a 31-year high of 1% in June and has signalled its readiness to keep pushing up borrowing costs to combat mounting price pressures from a weak yen and the energy shock caused by the Iran war. In timing the next rate hike, the BOJ has said it will scrutinise how the spike in producer prices could spread to consumer inflation, and the impact of its past rate hikes on the economy. The BOJ releases a summary of its quarterly outlook report on the day it concludes its policy meeting, and a full version the following market day. ($1 = 156.5500 yen) (Reporting by Leika Kihara; editing by Barbara Lewis)