The Bank of Japan (BOJ) has warned that rapid growth in artificial intelligence (AI)-related investments, increasing financial interconnectedness and sophisticated cyber threats could create new vulnerabilities for Japan’s banking sector and the broader financial system. The central bank has emphasised the need for stronger risk monitoring and operational resilience as technological developments introduce new channels through which financial shocks could spread across institutions and markets.
In its Financial System Report released on 23 October 2026, the BOJ observed that Japan’s financial system remained broadly stable, with banks maintaining sufficient capital and funding buffers to withstand severe economic and financial stress scenarios. However, it cautioned that uncertainties surrounding the profitability of AI-related investments, geopolitical tensions and developments in the global non-bank financial intermediation (NBFI) sector warranted continued monitoring.
The BOJ warned that if expectations regarding the future profitability of AI investments weaken, financial markets could experience significant corrections. Such developments could prompt investment funds to adjust their portfolios, potentially amplifying market volatility and transmitting losses across interconnected financial institutions.
Japanese banks have also increased their lending and investment exposure to overseas non-bank financial institutions. Although direct lending to foreign funds and data centres accounts for a relatively limited share of major banks’ overseas loan portfolios, these exposures represent an emerging risk area requiring careful credit assessment and portfolio monitoring.
The central bank highlighted that rising Japanese equity prices have partly reflected expectations of stronger earnings from AI-related industries. A correction in global technology markets could therefore affect Japanese financial institutions through declines in equity valuations, investment losses and changes in funding conditions.
The report also examined the impact of changing interest rates on financial institutions, businesses and households. While Japanese banks remain adequately capitalised, the central bank stressed that financial stability assessments must account for the combined effects of market volatility, geopolitical disruptions, interest rate changes and shifts in credit conditions.
Cybersecurity emerged as another important area of concern. The BOJ observed that advances in frontier AI technologies could increase the speed, sophistication and scale of cyberattacks against financial institutions. The misuse of generative AI and other advanced technological capabilities could create additional challenges for cybersecurity prevention, detection and incident response.
Importantly, the central bank recognised that major cyber incidents could extend beyond individual financial institutions and become a broader financial stability concern. Because banks, payment systems and other financial intermediaries operate through interconnected technology infrastructure, a disruption affecting one institution could potentially spread across the financial ecosystem.
The BOJ has therefore emphasised the importance of strengthening cybersecurity resilience at both institutional and system-wide levels. It intends to continue monitoring financial institutions’ preparedness through supervisory examinations and ongoing assessments of emerging vulnerabilities.
RMAI Risk Perspective: The Bank of Japan’s assessment highlights how artificial intelligence can introduce financial risks through multiple interconnected channels, including investment concentration, credit exposures, market volatility and cybersecurity vulnerabilities. Financial institutions should consider integrating AI-related market shocks, non-bank counterparty risks and large-scale cyber incidents into enterprise-wide stress testing and operational resilience planning. A key question for risk professionals is whether existing risk management frameworks adequately capture the possibility of simultaneous financial market disruptions and technology-driven operational failures.
