Bank of Japan to roll out new scheme to fight climate change

The Bank of Japan surprised markets on Friday by unveiling a plan to boost funding for fighting climate change, joining a growing number of central banks stepping up efforts to address its economic and financial fallout.

The central bank also maintained its massive stimulus to support the economy and extended a September deadline for its pandemic-relief programme, suggesting that Japan will lag well behind the United States in ending crisis-mode policies.

“In Japan, inflation had not reached 2 per cent even before the pandemic. As such, we must continue with our ultra-loose monetary policy even after the pandemic subsides, in order to achieve our 2 per cent inflation target,” BOJ governor Haruhiko Kuroda told a briefing after the policy decision.

The BOJ said it will launch the climate change scheme by the end of this year, and will release a preliminary outline of its plan at its next policy-setting meeting in July.

Under the scheme, the BOJ will provide funds to financial institutions that increase loans and investment for activities aimed at combating climate change.

While details have yet to be announced, the BOJ said it will be modelled after a similar programme that offers cheap loans to financial institutions that boost lending in areas considered to be growth industries.

“The BOJ probably wanted to move in tandem with the government, which recently flagged steps to promote green in its policy blueprint,” Naomi Muguruma, senior market economist at Mitsubishi UFJ Morgan Stanley Securities, said.

“It is also jumping on the bandwagon of the rising tide among central banks towards linking monetary policy to climate change,” she said.

While the BOJ does not rule out buying green bonds in the future, the new scheme is better suited to address climate change in Japan where most companies rely on bank loans rather than raise funds from the market, Mr Kuroda said.

“Climate change issues could exert an extremely large impact on economic activity, prices and financial conditions from a medium- to long-term perspective,” Mr Kuroda said.

“By creating this scheme, we can respond flexibly to changes in the external environment regarding climate change,” he said.

Japan is among the world’s most disaster-prone countries with a history of big earthquakes and typhoons. It has been affected heavily by climate change, with heavy rain and floods causing many casualties almost annually.

But many Japanese companies have dragged their feet on climate issues compared to their European counterparts, partly due to the country’s heavy reliance on thermal and coal power energy.

On Friday, Sumitomo’s shareholders defeated a resolution requiring the Japanese trading house to align its business with international targets on climate change.

At the two-day meeting, the BOJ also kept its target for short-term interest rates at -0.1 per cent and for long-term yields around 0 per cent, as widely expected, and extended by six months the September deadline for its asset-buying and loan programmes.

While maintaining its assessment that the economy was recovering as a trend thanks to robust exports and output, the BOJ warned that consumption was “stagnating”.

Mr Kuroda, however, said he was more optimistic about Japan’s economic outlook than at the BOJ’s previous meeting in April thanks partly to stronger-than-expected overseas growth.

“Vaccine inoculation in Japan is speeding up quite a bit. If this continues, there’s a chance that consumption may recover faster than expected,” he said. “My personal view is that Japan’s economic outlook is brighter than before.”

Japan’s economy shrank an annualised 3.9 per cent in the first quarter and is seen making only a modest rebound, if any, in the current quarter as anti-virus measures weigh on consumption.

Core consumer prices in May rose 0.1 per cent from a year earlier, marking the first year-on-year increase since March 2020 but remaining far distant from the BOJ’s 2 per cent goal.