Will unveil the initial details of green lending measure at a policy meeting ending on July 16

The Bank of Japan (BOJ) seems set to offer incentives for banks to provide loans to battle against climate change when they meet later this month.

Economists told Bloomberg that Japan’s Central Bank Governor, Haruhiko Kuroda and his board has promised to unveil the initial details of its green lending measure at a policy meeting ending on July 16. Most analysts expecting the measure 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, informed sources say some BOJ officials want to avoid getting bogged down in trying to differentiate between green projects. The decision to support climate change mitigation efforts already takes the BOJ well beyond the conventional remit of a central bank.

This has raised questions over where its responsibilities end and the government’s begin. However, with European central banks taking the lead on grappling with the issue, the Japanese Central Bank officials don’t want to be seen as passively sitting back.

BOJ will likely end up offering banks 0.1% or 0.2% interest

“The BOJ will likely end up offering banks 0.1 per cent or 0.2 per cent interest,” Naomi Muguruma, senior market economist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo, told Bloomberg.

She added: “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 per cent 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 per cent or 0.2 per cent 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 green washing or attempts to get preferential treatment and favourable publicity without genuine measures to help transition efforts.

Questioning why the BOJ is stepping into a new green realm

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 programme would allow the BOJ to indirectly choose good companies and bad companies,” explained 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.”

Yuichi Kodama, of Meiji Yasuda Research Institute, is expecting 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 added.

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.