Financial System Report (October 2026) : 日本銀行 Bank of Japan

The Bank of Japan’s October 2026 Financial System Report assesses financial stability amid global AI-related demand, which has boosted market sentiment despite lingering uncertainties over the Middle East. Stock prices have risen, and corporate bond credit spreads remain low, but risks persist from geopolitical tensions, AI investment profitability, and the expanding role of non-bank financial intermediaries (NBFIs) in global financing. The report notes that private funds and other NBFIs have become key providers of capital for AI-related investments, particularly where hyperscalers rely on external financing. Japanese banks’ capital and funding bases are deemed sufficient to withstand severe stress scenarios, including shocks equivalent to the global financial crisis.

The report examines the impact of rising raw material and energy prices linked to Middle East developments on small and medium-sized enterprises (SMEs), as well as the effects of interest rate increases on corporate and household sectors. It also evaluates banks’ profitability and loss-absorbing capacity during policy rate hikes, alongside challenges in loan and deposit management. Additionally, the report reviews cybersecurity threats heightened by advances in frontier AI, assessing efforts by financial institutions and authorities to mitigate risks.

Japanese banks’ lending stance remains active as firms’ loan demand continues to rise, with no major financial imbalances detected in current activities. The report highlights that Japanese banks can withstand compound stress scenarios, including geopolitical risks, declines in AI-related investment expectations, and substantial interest rate hikes. However, it emphasizes the need for continued monitoring of factors such as Middle East developments, AI investment profitability, and NBFI sector trends, which could transmit shocks through global financial channels.

Real estate prices in Japan have been rising, particularly in major metropolitan areas like Tokyo, driven by economic recovery, construction cost surges, and robust demand from both domestic and foreign investors. The report notes that while real estate price-to-rent ratios remain broadly aligned with trends, the pace of price increases has accelerated, warranting close attention. It also highlights the growing exposure of Japan’s financial system to fluctuations in global markets through increased investments in foreign NBFIs and foreign funds’ holdings of Japanese assets.