Bank of Japan Says Banking System Resilient but Flags Rising Asset Prices and AI-Linked Risks

The Bank of Japan said Japan’s financial system remains stable overall and that the country’s banks have enough capital and funding to withstand severe shocks, even as the central bank warned that rising stock and real estate prices warrant close monitoring.

In its “Financial System Report (October 2026),” released Friday, the BOJ said it “basically uses data available as of end-September 2026” and offered its regular twice-yearly checkup on the health of the banking system and broader financial system. The report covers major banks, regional banks and shinkin banks, and pairs an overall message of resilience with a closer look at risks the BOJ says are building.

“Japan's financial system has been maintaining stability on the whole,” the report said.

The BOJ said Japanese banks “have sufficient capital bases and stable funding bases to withstand various stress situations,” including two severe scenarios. One is stress on the scale of the global financial crisis, with major corrections in financial markets and the real economy in Japan and abroad. The other is a compound shock in which geopolitical risks such as a rise in crude oil prices, a decline in expectations regarding artificial intelligence, and a substantial rise in interest rates all hit at the same time.

That finding is central to the BOJ’s latest assessment: even under sharp market and economic stress, the banking system as a whole has the financial buffers to absorb losses and continue functioning.

A key new feature of the October report is a more refined stress test around AI-related investment. The BOJ said it examined the impact of a drop in expectations for the profitability of AI-related investment and assumed that shocks would be amplified mainly through portfolio adjustments by foreign nonbank financial intermediaries, or NBFIs — firms outside the banking system such as some funds and other market-based investors.

“This Report examines these recent developments and, in its macro stress testing, refines the specification of the impact of a decline in expectations regarding the profitability of AI-related investment and assumes the situation where shocks are amplified mainly by portfolio adjustments in the foreign NBFI sector, thereby assessing the adequacy of banks' capital,” the BOJ said.

The emphasis marks a sharper turn from earlier editions toward valuation risk tied to AI and the channels through which foreign nonbanks could intensify market stress. Compared with the April 2026 report, the October edition continues to focus on geopolitical and energy-price shocks, nonbank financial intermediaries and asset-price risks, while adding a more detailed analytical focus on AI-related vulnerabilities.

The report also flagged a rise in stock prices and real estate prices, with real estate prices increasing especially in Tokyo. Those developments require “careful attention and close monitoring,” the BOJ said.

Beyond asset prices, the BOJ examined how higher raw material and energy prices linked to the situation in the Middle East could affect small and medium-sized businesses. It also reviewed the effects of higher interest rates on the corporate and household sectors.

The central bank said advances in “frontier AI” have also heightened cybersecurity threats, and the report reviewed how financial institutions and authorities are responding.

The BOJ publishes the Financial System Report every April and October as its regular macroprudential assessment, meaning its systemwide review of financial risks. This latest edition largely extends themes from earlier this year but sharpens the focus on how disappointment around AI investment and stress in foreign nonbanks could amplify shocks, even as the BOJ’s headline message remains that Japan’s financial system is resilient overall.