The Bank of Japan's October 2026 Financial System Report assesses that the system remains broadly stable: banks have enough capital and stable funding to withstand a global financial crisis-level stress or a compound shock of higher oil prices, weaker AI expectations and a sharp rise in interest rates. Close monitoring is warranted for the Middle East, the profitability and financing of AI investment, and foreign non-bank financial intermediaries (NBFIs). Stock prices remain above trend, though P/E ratios are broadly around their average levels since 2008 as expected earnings rise. Longer term, declining loan demand from population decline could weaken bank profits and loss-absorbing capacity, raising the risk of either contraction or overheating in lending. The report also examines the effects of energy and raw material prices and rate hikes on SMEs and households, and cybersecurity threats from frontier AI.
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The Bank of Japan's October 2026 Financial System Report assesses Japan's financial system as broadly stable, with the loan market functioning smoothly as firms' loan demand keeps rising and banks remain active lenders. Japanese banks have sufficient capital and stable funding to withstand stresses, including a global financial crisis-level shock and a compound scenario of geopolitical risks, a decline in AI expectations and a substantial rise in interest rates. The report says close monitoring is needed of the Middle East situation, the profitability and financing of AI-related investment, and developments in the foreign non-bank financial intermediary (NBFI) sector. Over the longer term, a structural decline in loan demand from population decline could weaken banks' profitability and loss-absorbing capacity.
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