The Bank of Japan warned on Monday that demand connected to artificial intelligence could create lasting upward pressure on domestic inflation, underscoring the central bank's concern about mounting price risks that could strengthen the case for another interest rate increase in the near term.
In its full quarterly outlook report, the BOJ acknowledged the dual nature of AI's economic effects. Over the medium to long term, the central bank said, AI adoption by firms and workers should lift productivity and exert downward force on prices. Yet the report cautioned that - at least initially - the surge in investment linked to AI is likely to have a stronger inflationary impact.
"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," the report said.
The BOJ linked recent increases in producer prices to two main factors. One is the rise in oil prices stemming from the Middle East conflict, which has pushed energy costs higher. The other is what the report described as a "positive global demand shock" for AI-related goods.
According to the report, the spill-over from elevated global AI demand is likely to persist for some time. Combined with the ongoing boost to import costs from a weaker yen, that persistence could maintain firm 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 said.
The report also assessed the distributional effects of higher interest rates on household balance sheets. Japanese households collectively hold about 2,400 trillion yen in financial assets, the BOJ noted, with deposits making up roughly 1,000 trillion yen of that total. Household liabilities are comparatively limited at roughly 400 trillion yen, more than half of which are mortgage loans.
"As the total volume of household deposits substantially exceeds outstanding borrowing, Japanese households as a whole benefit from higher interest rates," the report said.
Policy-wise, the BOJ lifted its policy rate to 1 percent in June - a 31-year high - and has indicated it is prepared to continue raising borrowing costs to counter growing price pressures stemming from the weak yen and the energy shock tied to the Iran war. In setting the timing for any future rate move, the central bank said it will closely examine how the jump in producer prices feeds through to consumer inflation and how earlier rate increases have affected the economy.
The central bank publishes a summary of its quarterly outlook when it finishes a policy meeting, followed by the full report on the next market day. The report included the exchange-rate reference of $1 = 156.5500 yen.
For analysts tracking inflation dynamics and monetary policy, the BOJ's assessment highlights a near-term risk that demand-driven investment in AI could sustain higher consumer prices even as structural productivity gains from AI emerge over a longer horizon. The report underlines the central bank's balancing act: weighing short-run inflationary impulses against the prospect of medium-term price moderation through technological adoption.