Bank of Japan warns of risks from AI market shock, cyberattacks

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TOKYO, Oct 23 : The Bank of Japan warned on Friday of rising risks caused by AI, including growing cybersecurity threats and potential market shocks, that could spill over to the country's banking system.

 While the BOJ said in its semi-annual report it did not see any major financial imbalances, it said rising property and stock prices warranted careful attention given still-low interest rates.

Japan's financial system may have become more susceptible to global market fluctuations as domestic banks have steadily increased lending to foreign non-bank financial institutions (NBFIs), which are big hyperscaler funders, the BOJ said in the report on Japan's banking system.

"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.

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NBFIs are involved in what is commonly referred to as the "shadow banking" sector that includes private credit providers and private equity funds.

If hyperscalers do not meet lofty market expectations, the resulting global market correction could hit Japanese stock prices that have risen on hopes of strong profits in AI-related sectors, the BOJ report said.

"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.

OVERHEATING CONCERNS

 Property price growth has accelerated in Japan's three major metropolitan areas with surging construction costs and labour shortages adding to upward pressure from strong demand, including from foreign investors, the report said.

The BOJ raised interest rates to a 31-year high of 1.25 per cent last month and signalled its readiness to keep increasing borrowing costs to prevent inflation from overshooting its 2 per cent target.

It has also stressed the need to scrutinise banks' lending behaviour and financial conditions in determining the timing and pace of future rate hikes.

As cyberattacks using AI triggered shutdowns of websites across the globe, the BOJ also urged financial institutions to better prepare for threats including the misuse of generative AI.

"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.

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