Will the AI boom raise interest rates? The new relationship between 'AI and monetary easing' that the Bank of Japan has begun to see

Good morning. This is WorldBrief Japan.

AI increases corporate productivity.

AI increases investment.

AI boosts economic growth.

So far, this is a common story.

However, on October 5th, Bank of Japan Deputy Governor Uchida pointed to another possibility beyond that.

The AI boom could not only loosen financial conditions but also become a factor that pushes up interest rates in the future.

AI is beginning to affect not only stock prices but also Japanese interest rates, the yen, and mortgages.

What happened today

According to Reuters, Bank of Japan Deputy Governor Uchida explained that the global AI boom has temporarily eased financial conditions by boosting demand and raising asset prices.

On the other hand, he also mentioned that large-scale corporate bond issuance by AI-related companies is putting upward pressure on long-term interest rates, and that there is a risk of market adjustment if the profits expected from AI do not materialize.

In other words, the Bank of Japan does not see AI merely as a technological innovation.

They have begun to see it as an economic factor that changes how monetary policy works.

Why does AI affect interest rates?

AI-related companies are continuing to make massive capital investments in data centers, semiconductors, power, and networks.

This investment increases corporate borrowing and bond issuance.

If borrowers increase all at once, the demand for funds rises.

As a result, there is a possibility that upward pressure on interest rates will be applied not only to corporate loans and the corporate bond market, but also to the government bond market.

AI looks like software.

But in reality, it is a capital-intensive industry that requires a large amount of capital investment.

Behind NVIDIA’s AI infrastructure financing initiatives and the ongoing large-scale investments in data centers lies this ‘demand for capital to power AI’.

Therefore, as long as the AI boom continues, it creates a contradiction: while it boosts the economy, it also makes it harder to lower interest rates.

What is truly important is that AI is changing the ‘premises of monetary policy’.

Until now, central banks have operated under the view that they should lower interest rates when the economy is weak and raise them when the economy is overheating.

However, when AI investment expands rapidly, a situation arises where only AI-related sectors are strong while other parts of the economy remain weak.

In Japan, the Nikkei Stock Average briefly recovered to the 70,000 yen level on October 5th, but that rise was heavily supported by AI and semiconductor-related stocks. The market as a whole is not necessarily strong across the board.

If monetary easing continues in this state, there is a possibility that funds will concentrate in specific assets, such as AI-related assets and real estate.

Conversely, if tightening is done too quickly, it will place a burden on small and medium-sized enterprises outside of AI and on personal consumption.

AI is both a ‘source of growth’ and a potential ‘factor for asset price overheating’ for monetary policy.

Impact on Japan

In Japan, the weak yen and rising energy prices are already pushing up prices.

If increased demand from AI-related investment is added to this, price increases may shift from temporary import-driven inflation to a form accompanied by domestic demand.

If that happens, the Bank of Japan will be forced to make a difficult decision: ‘We do not want to cool down the AI economy, but we cannot keep interest rates low either’.

In the Japanese financial market, government bond yields, the yen exchange rate, bank stocks, and growth stock valuations may all move simultaneously.

Implications for employees, investors, and those with side jobs

For employees, mortgage rates and corporate borrowing costs are important.

Even if AI investment is strong, if interest rates remain high, it may put the brakes on home purchases, capital investment, and corporate hiring plans.

For investors, looking only at the sales of AI companies is insufficient.

From now on,

• how much AI investment depends on borrowing

• Whether corporate bond issuance is increasing

• Whether profits are exceeding investment amounts

• Whether the financial structure can withstand rising interest rates

is what we need to look at.

For those with side jobs, while there is the benefit of lower AI tool prices, there is also the possibility that corporate side job budgets and advertising budgets will shrink due to rising interest rates.

It will become important not only to be able to use AI, but also to consider revenue structures based on changes in interest rates and the economy.

What to watch in the next week to few months

There are three points I would like to focus on.

The first is how much the Bank of Japan will emphasize AI demand in its price forecasts and interest rate hike decisions.

The second is the relationship between corporate bond issuance by AI-related companies and long-term interest rates.

The third is whether the rise in AI stocks will spread to companies other than semiconductors, as well as to employment and wages.

If the AI boom leads to genuine productivity improvements, it may be possible to absorb interest rate hikes.

However, if investments and borrowing swell before profits do, a scenario where stock prices, bonds, and corporate credit are shaken simultaneously could occur.

AI is a technology that grows the economy.

At the same time, it is also a technology that may change the common sense of monetary policy.

When looking at AI news from now on, I would like to look not only at “which model has become smarter,” but also at

who is providing the investment funds and who is bearing the risk of rising interest rates

.

The AI boom may be starting to shift from a story about stock prices to a story about interest rates.

*This article is for informational purposes only and does not recommend the buying or selling of any specific financial products or stocks.