TOKYO -- Japanese banks would maintain capital ratios above regulatory requirements even in a scenario involving a surge in global interest rates and a collapse in artificial intelligence-linked stocks, the Bank of Japan said in its semiannual Financial System Report released on Friday.

Under the stress test, rising interest rates and an economic slowdown abroad sharply undermine expectations for returns on AI-related investments. The BOJ assumed U.S. stock prices would fall by about 50% and Japanese equities by roughly 40% compared with baseline projections.

The scenario also assumes losses on loans tied to data centers and a deep slump in economic growth across Asia, where AI-related industries account for a significant share of economic activity.

Under such strain, banks and other financial institutions would face higher credit costs to prepare for loan losses, while declines in the value of their stock and bond holdings would erode their capital adequacy ratios.

Even so, the BOJ report emphasized that overall ratios would remain above regulatory minimums across all categories of institutions, including internationally active banks, banks that follow domestic standards, and credit cooperatives. Japan's financial system would "maintain overall stability," the report said. The report also examined lending trends in the real estate sector, which has shown signs of overheating.

Although the BOJ is in a rate-hike cycle, default rates among companies engaged in real estate transactions and leasing "have remained low," the report said.

In the property leasing sector, the increase in interest expenses resulting from higher borrowing costs has largely been offset by improved earnings driven by rising rents, according to the report.

"We will continue to monitor changes in the real estate market, given its high sensitivity to interest rates," a BOJ official said.