Japan to simulate cyberattacks with AI after PHP flaws

The Bank of Japan (BOJ) issued a warning on Friday regarding potential risks stemming from the AI market and cyberattacks that could impact Japan's banking system. In its semi-annual report, the BOJ did not identify any major financial imbalances, but emphasized the need to closely monitor the rising property and stock prices, particularly in light of low interest rates.

The report highlighted that Japan's financial system may be more vulnerable to global market fluctuations due to increased lending by domestic banks to foreign non-bank financial institutions (NBFIs), which are significant investors in AI-related sectors. The BOJ cautioned that should expectations of AI-related investment profitability decline, market shocks could escalate, primarily through portfolio adjustments in the foreign NBFI sector, potentially affecting Japan's economy.

The BOJ also stressed that if hyperscalers fail to meet market expectations, a global market correction could negatively impact Japan's stock prices, which have risen on the anticipation of strong profits in AI-related industries. Given the Japanese banks' exposure to market risks through their stockholdings, the BOJ urged ongoing vigilance on developments in risky asset prices, including stock prices.

The BOJ has raised interest rates to a 31-year high of 1.25%, signaling a commitment to maintaining high borrowing costs to curb inflation. The central bank has also warned about the increasing risks of cyberattacks facilitated by AI, emphasizing that such incidents not only endanger individual financial institutions and their customers but also pose a material risk from a macroprudential perspective, as their repercussions could spread to other financial institutions.