The Bank of Japan joined the global battle against climate change with a series of incentives for lenders to help businesses move toward a greener economy and plans to buy foreign green bonds.
The BOJ, in a statement on Friday (July 16), said it would offer banks interest-free funds for climate-linked loans or investments and exempt more of their reserves from its negative interest rate.
In a separate release detailing its climate strategy, the BOJ said it would buy green bonds denominated in foreign currencies using its foreign reserves, though it still held off committing to targeting Japanese green securities.
While the incentives are BOJ’s first specific steps to support efforts to rein in global warming and demonstrate its willingness to step beyond the conventional bounds of a central bank, a majority of economists had expected the central bank to go further, by offering to pay a small amount of interest on green lending.
“The timing of this is ambitious, but the BOJ steps are small compared with the European Central Bank and the Bank of England,” said Kyohei Morita, chief Japan economist at Credit Agricole Securities Asia, referring to the incentives. “The BOJ clearly isn’t trying to be a game changer by itself unlike the Europeans.”
The ECB last week said it would consider climate change when assessing its asset purchases and broader policy decisions. The BoE added an environmental element to its mandate recently and has committed itself to buying more green assets.
With Friday’s moves, Governor Haruhiko Kuroda and his colleagues moved in the direction of their European peers and also put themselves in closer alignment with Japan’s government and its goal to cut greenhouse gas emissions by 2050. Kuroda first flagged his intention to take action on climate change in an interview with Bloomberg News in May.
Given the increasing issuance of green bonds globally, the BOJ said it would buy them in accordance with its principles for managing its foreign currency assets, which require a high degree of safety and liquidity. The BOJ indicated earlier this week that it would indirectly buy green bonds in partnership with other Asia-Pacific central bankers.
In its statement, the BOJ said it aimed to launch the new climate facility by the end of this year providing interest-free funding for one-year terms to banks to support their climate loans. The BOJ indicated there would be no limit on rolling over the funding.
The BOJ said it would also increase the amount of reserves exempt from its negative interest rate by twice the amount lent out by banks.
More than half of surveyed economists had expected the BOJ to do more, by offering to pay 0.1 or 0.2 per cent interest on amounts matching the loans or investments for environmentally friendly projects. Those are the terms the BOJ offers banks now under a special Covid-era funding program.
The BOJ may have toned down its approach after Japanese lenders gave a chilly reception to its more ambitious ideas.
In recent meetings, representatives from some banks told BOJ officials they didn’t want the new funding measure to pay interest because of the risk of unintended consequences, people familiar with the matter said.
The lenders worry that profit margins could be squeezed even further if borrowers start demanding lower rates, knowing that BOJ money is also on the table, the people said.