Bank of Japan says banks can withstand stress, flags AI investment risks
The central bank said Japan's financial system has been maintaining stability on the whole, while warning that a fall in expectations for AI investment could spill over to Japan.
AI illustrationJapan's financial system has been maintaining stability on the whole, the Bank of Japan said in its Financial System Report for October 2026, published on October 23. It said Japanese banks have sufficient capital and stable funding to withstand various stress situations.
Those scenarios include stress equivalent to the global financial crisis, and a compound shock in which geopolitical risks such as a rise in crude oil prices, a decline in expectations regarding AI and a substantial rise in interest rates all happen at the same time.
This year's stress test gave particular weight to AI. The bank refined how it models a decline in expectations about the profitability of AI-related investment, and assumed that shocks are amplified mainly by portfolio adjustments among foreign non-bank financial intermediaries. Based on the results, it judged that the stability of Japan's financial system is maintained, but said the sustainability of global AI-related demand needs careful monitoring.
The bank said hyperscalers, particularly in the United States, have significantly increased business investment and have recently turned more to external financing, mainly through corporate bonds. Private funds and other foreign non-banks have played an increasingly prominent role in financing what the hyperscalers cannot cover themselves. If expectations for AI profitability were to decline, shocks could be amplified through those non-banks and the effects could spill over to Japan, the bank said.
On asset prices, the bank said Japanese stock prices have been rising on expected profit gains in sectors that benefit from AI-related demand, and could face adjustment pressure if profits do not keep pace with large AI investments. Price-earnings ratios at the end of September remained broadly around their average levels since 2008. Real estate prices have been rising, and the pace has been accelerating in the three major metropolitan areas, particularly around Tokyo.
The bank also examined a hypothetical 100 percent rise in crude oil prices. It found the share of small and medium-sized enterprises whose probability of default increases is overall limited, though some firms with cost structures sensitive to oil prices show relatively large increases.
In households, the bank said rising wages are likely to ease the burden of higher rates on floating-rate housing loans, but said the growing use of housing loans with maturities of more than 35 years warrants attention. Over the long term, it said a persistent structural decline in firms' loan demand, mainly reflecting population decline, could reduce banks' profitability and loss-absorbing capacity.