Bank of Japan warns AI investment shock could hit banks
The central bank finds no major financial imbalances but says growing lending to foreign non-bank financiers may leave Japan more exposed to global market swings.
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The central bank finds no major financial imbalances but says growing lending to foreign non-bank financiers may leave Japan more exposed to global market swings.
The Bank of Japan warned on October 23 that Japanese banks' growing lending to foreign non-bank financial institutions could allow an AI investment shock abroad to spread to Japan, according to Reuters reporting published by CNA.
Banks have steadily increased lending to these institutions, which are major funders of hyperscalers—companies operating very large computing infrastructure. The central bank’s semiannual financial-system report found no major financial imbalances, but said rising stock and property prices warranted close attention while interest rates remained low.
Non-bank financial institutions include private credit providers and private equity funds, part of the sector often called “shadow banking”. The Bank of Japan said that if expectations for the profitability of AI investment fell, these foreign financiers could adjust their investment holdings in ways that amplified market shocks and carried their effects to Japan.
Banks' shareholdings create another route for losses. Japanese share prices have risen on expectations of strong profits in AI-related sectors, the report said. If hyperscalers failed to meet market expectations, a global market correction could pull down Japanese shares and affect banks that own them. The central bank called for continued attention to risky asset prices, including stocks.
The report also said property-price growth had accelerated in Japan’s three major metropolitan areas. Strong demand, including from foreign investors, was pushing prices higher, with surging construction costs and labour shortages adding pressure.
The Bank of Japan raised its policy interest rate to 1.25 per cent in September, a 31-year high, and signalled readiness to raise borrowing costs further to prevent inflation from overshooting its 2 per cent target. It has stressed that banks' lending behaviour and financial conditions need scrutiny in deciding the timing and pace of further increases.
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