BoJ's Uchida warns AI-driven easing of financial conditions could reverse if profits lag

"Tentatively, it appears the demand side has come first and made financial conditions more accommodative on balance," Uchida said ^[5]. That sentence has two hedges, "tentatively" and "on balance". The balance it describes sets a price against a liability. An AI-linked share price is what investors pay today for profits they expect later. The bonds AI-related firms have sold are debt, and they are owed on schedule whatever those profits turn out to be ^[4].

"But there is a risk of correction if profits do not follow," he said ^[6]. In Crypto Briefing's account of the speech, he warned that AI's demand benefits could be offset if corporate profits stagnate ^[7]. A shortfall would hit the two sides unevenly. Share prices can fall as fast as expectations do, while debt already sold stays outstanding until it matures.

If AI profits arrive, there is no correction, and the BoJ's AI question becomes one about inflation alone, or rather, about how much of the inflation it is fighting comes from AI demand and how much from oil. If profits stall, the equity easing reverses while the debt stays, and that tightening lands on top of the BoJ's own rate rises ^[10]. A third possibility is a correction that pushes investors into government bonds and pulls long-term rates down as equities fall. In that case the two sides partly cancel.

I think the second case is the one the speech is written to warn about. The counter-thesis is in the same Channel NewsAsia report. The June and September hikes came as an energy shock from the Iran war added to price pressure from a weak yen ^[10]. Japan imports almost all of its crude oil, and most of it came from the Middle East before the Strait of Hormuz closed ^[11]. On that record, oil sets Japan's rate path and AI is a secondary input. Neither report says where the AI debt was issued. Uchida spoke of worldwide adoption and a global boom ^[2][3]. If most of that debt is dollar paper from foreign companies, it moves Japanese long rates through global yields.

Uchida's speech dealt with financial conditions and the wider economy ^[3]. The financial-stability side of the BoJ's AI work has come from elsewhere. Governor Kazuo Ueda has spoken before about AI's possible effect on financial stability ^[13]. The BoJ and the Financial Services Agency have also issued guidelines on generative-AI risks, cybersecurity among them ^[14]. According to Crypto Briefing, surveys show generative-AI use at Japanese financial institutions is growing but still at an early stage ^[15].

The warning would prove overdone if AI-linked profits arrive at the pace share prices imply, or if long-term rates fall while AI firms keep borrowing.