BOJ Seen Paying Banks to Lend in Battle Against Climate Change

Bank of Japan Governor Haruhiko Kuroda and his board are likely to offer incentives for lending in the battle against climate change when they meet later this month, according to economists.

The central bank has promised to unveil the initial details of its green lending measure at a policy meeting ending on July 16, with most analysts expecting it to model the facility at least partially on Covid-19 loan incentives introduced in March.

While that framework offers to pay commercial banks different rates depending on the purpose of lending, some BOJ officials want to avoid getting bogged down in trying to differentiate between green projects, according to people familiar with the matter.

BOJ Seen Paying Banks to Lend in Battle Against Climate Change

The decision to support climate change mitigation efforts already takes the BOJ well beyond the conventional remit of a central bank, raising questions over where its responsibilities end and the government’s begin. But with European central banks taking the lead on grappling with the issue, BOJ officials don’t want to be seen as passively sitting back, the people said.

“The BOJ will likely end up offering banks 0.1% or 0.2% interest,” said Naomi Muguruma, senior market economist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. “That’s not going to be a game-changer, but at least the bank is trying to show it’s doing what it can by jumping into untested waters.”

Even before the BOJ announced in June its intention to introduce the climate measure, some 83% of economists surveyed by Bloomberg said they expected the incentives approach would eventually be used for green or growth objectives after the pandemic.

Under the March incentives, loans from the central bank to commercial banks are either interest-free or the central bank indirectly pays interest of 0.1% or 0.2% to the banks on the amounts they then lend out to companies.

If this model is used, the BOJ runs the risk of having to make decisions on what constitutes a good green project and what is greenwashing or attempts to get preferential treatment and favorable publicity without genuine measures to help transition efforts.

Some economists are questioning why the BOJ is stepping into a new green realm when it has yet to meet an inflation target in its own conventional realm of central banking.

“The climate program would allow the BOJ to indirectly choose good companies and bad companies,” said Daisuke Karakama, chief market economist at Mizuho Bank. “I don’t think they have the right to do that. They’re not politicians. They aren’t elected by public.”

From the get-go, Kuroda has said he wants to keep the measure neutral for markets and to avoid getting involved in micro managing the allocation of resources as much as possible.

Those concerns could favor a simpler system to begin with.

Yuichi Kodama of Meiji Yasuda Research Institute says he expects the BOJ will simply offer zero-interest loans. The need to show policy coordination with the government’s climate goal is ultimately more important than actually giving incentives to that end, he said.

Like it did with of its second Covid lending measure, the BOJ could latch on to the Suga administration’s lead and provide funding for loans guaranteed by government ministries or agencies.

Muguruma sees the possibility of the BOJ taking an approach along those lines. Adopting government guidelines would enable the central bank to avoid establishing its own taxonomy for defining how green a loan is, she said.

While no conclusions have been made, some BOJ officials see that kind of approach as a possibility, the people said.

Japan’s environment ministry guidelines set out conditions for green loans and requires follow-up reports to ensure transparency. The industry ministry is working on making a transition finance map.

While it’s unclear how many details the BOJ will give next week, a concern for Japan’s biggest banks is whether the climate measure will also support green loans and investment involving projects overseas.

©2021 Bloomberg L.P.

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