BOJ warns AI market correction, cyberattacks could threaten Japan’s banks

The Bank of Japan warned on Friday October 23, issued a formal warning in its semi-annual Financial System Report. It mentioned two specific concerns regarding the country's banking infrastructre- potential market correction driven by AI which could spillover to the country's banking system and growing cybersecurity threats.

"If expectations regarding the profitability of AI-related investment were to decline, shocks ​could be amplified, mainly through portfolio adjustments in the foreign NBFI sector, and the effects could spill over to Japan," it said.

It warned that Japan's financial system has become more susceptible to global market fluctuation as domestic banks have been lending to massive foreign investment funds, private equity groups, and private lenders- foreign non banking fincial insititutions (NBFI) which are in turn funding hyperscalers, a potential "shadow banking" vulnerability tied to the global artificial intelligence boom. If these hyperscalers failed to make profit which will trigger massive portfolio adjustment which could inturn hit Japanese stock prices that have risen on hopes of strong profits in AI-related sectors, the BOJ report said.

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"Given that ‌Japanese ⁠banks have a certain amount of market risk associated with their stockholdings, close attention should continue to be paid to developments in risky asset prices, including stock prices," the report said.

It also highlighted the risks of AI-supercharged cyber attacks, as frontier AI models uncover software vulnerabilities at an unprecedented rate.

"Cyber incidents not only pose a risk to individual financial ​institutions and their customers but are also a material risk from a macroprudential perspective, given their impact can potentially spread to other ​financial institutions," the report said.

The Bank of Japan have hiked interest rates in September 2026 to 1.25%, its second rate hike this year and expressed its willingness to keep increasing interest rates to prevent inflation ​from overshooting its 2% target. Further, the report also highlighted the risk of bad debts for banks. As real estate sector in metropolitan are heating up, with surging construction costs and labour shortages. Along aggressive demand from foreign investors who are taking advantage of a weak Japanese yen. If the AI market corrects, it could trigger a domino effect, with changes in investor sentiment leading to corrections across real estate sectors.