BOJ Warns AI Market Shock, Cyberattacks Could Spill Into Japan's Banking System

The Bank of Japan warned Friday that rising AI-related risks, including cybersecurity threats and potential market shocks, could spill over into the country's banking system. In its semi-annual financial system report, the BOJ said it saw no major financial imbalances but flagged rising property and stock prices as warranting close attention given still-low interest rates. The central bank said Japanese banks' growing lending to foreign non-bank financial institutions, major funders of hyperscalers, has made the financial system more susceptible to global market swings. It warned that a decline in AI investment profitability expectations could amplify shocks through portfolio adjustments in the foreign NBFI sector, with effects reaching Japan. The BOJ raised interest rates to a 31-year high of 1.25% last month and has signaled readiness to keep tightening. It also urged financial institutions to strengthen defenses against generative AI misuse, warning that cyber incidents pose a material macroprudential risk given their potential to spread across institutions.