BoJ’s Uchida: AI has become a major focus among central banks, including at BoJ policy meetings

Bank of Japan (BoJ) Deputy Governor Shinichi Uchida said on Monday that Artificial Intelligence (AI) has become a major focus among central banks, including at BoJ monetary policy meetings.

Key quotes

Adoption of AI could have both positive and negative effects on productivity and labor markets.

AI has become a major focus among central banks, including at BOJ monetary policy meetings.

AI impacts key monetary policy parameters including output gap, financial conditions, and star variables.

AI a major positive demand shock putting upward pressure on economy and prices.

AI may influence supply side, potentially boosting productivity and increasing capital stock accumulation.

AI has driven up stock prices, easing financial conditions, while significant bond sales by AI-related firms have pushed long-term rates higher.

We will keep closely monitoring economic and financial indicators to understand the consistent effects of AI adoption.

Tentatively, demand-side impact of al appears first, making financial conditions more accommodative on balance, while correction risk remains if profits do not.

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Market reaction

At the time of writing, the USD/JPY pair is down 0.21% on the day at 157.50.

BoJ flags AI as a new upside risk for inflation and the Yen

BoJ's Uchida speech scores 7.2 on FXS Speechtracker, exactly in line with Uchida’s historic average, signaling a steady but meaningful policy-relevant intervention. The emphasis on AI as a major positive demand shock, easing financial conditions and lifting stock prices, tilts the tone modestly hawkish as it frames AI as an upside risk to growth and prices that BoJ must factor into the output gap and star variables.

By highlighting that AI-related bond issuance is pushing long-term rates higher and that accommodative conditions could reverse if profits disappoint, the speech underscores two-way risks but leans toward vigilance on inflation rather than support for prolonged ultra-easy policy. For FX, the recognition that AI can tighten financial conditions over time and raise equilibrium rates is mildly supportive for the Yen, as it nudges expectations toward a BoJ that is less tolerant of persistent upside surprises to demand and prices.

Bank of Japan FAQs

What is the Bank of Japan?

The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.

What has been the Bank of Japan’s policy?

The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.

How do Bank of Japan’s decisions influence the Japanese Yen?

The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.

Why did the Bank of Japan decide to start unwinding its ultra-loose policy?

A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.

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