The Bank of Japan (BOJ) said Japan’s financial system remained stable and banks could absorb severe modeled shocks, even as growing foreign nonbank exposure may expose the country to global market volatility.
Credit conditions remained orderly: companies sought more loans, banks continued to provide credit and the BOJ detected no broad excesses in current activity, according to its Oct. 23 Financial System Report.
Japanese banks’ loans and investments to foreign nonbank financial intermediaries, or NBFIs, totaled ¥126 trillion in June 2026, up from ¥8 trillion in March 2008, a BOJ chart showed. Foreign investment funds had ¥408 trillion invested in Japanese markets, compared with ¥111 trillion in March 2008.
Private funds and other foreign NBFIs have taken a larger role in funding AI projects that hyperscalers cannot finance with their own resources, the report said. Hyperscalers have turned to outside financing, including corporate bonds and long-term leases for third-party data centers. The BOJ warned that lower expectations for AI investment profitability could lead foreign NBFIs to rebalance portfolios, intensifying market shocks and transmitting stress to Japan.
Under the BOJ’s severe “rises in foreign interest rates plus” scenario, modeled capital ratios at the end of fiscal 2028 were 8.9% for internationally active banks, 8.8% for domestic banks excluding shinkin banks and 13.2% for shinkin banks. The baseline figures were 12.8%, 10.4% and 14.0%, respectively. All three stress-scenario ratios remained above regulatory requirements. The tests also covered a shock comparable to the global financial crisis and a combined case involving geopolitical risks, weaker AI-profit expectations and sharply higher interest rates.
Higher raw-material and energy prices are weighing on small and medium-sized enterprise (SME) profits, the BOJ said. In a test that doubled crude oil prices, the share of SMEs with a higher probability of default remained limited overall, although some businesses with oil-sensitive costs faced larger increases.
Over time, population decline could reduce companies’ borrowing needs, weakening bank earnings and their capacity to absorb losses, the BOJ warned. That could constrain lending or encourage banks to take greater risks in pursuit of returns. The central bank said it would monitor developments in the Middle East, AI investment and foreign NBFIs.
