The Bank of Japan has 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 Friday, 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. The central bank also left its main policy settings unchanged and tweaked its economic forecasts to reflect the latest virus restrictions as Japan readies for a fan-free Olympics.

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, Gov. 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% 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-19-era funding program.

“This doesn’t give banks much incentive to step up lending to fight climate change — and suggests the BOJ is keen to avoid distorting capital allocation with the program,” says Yuki Masujima, economist at Bloomberg Economics.

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.

The BOJ also released updated forecasts that showed it largely sees the economy growing a little slower this year and a touch faster next year, likely to reflect the latest business restrictions to contain new virus outbreaks in the run-up to the Tokyo Olympics next week.

On inflation, the central bank sees key consumer prices rising 0.6% this fiscal year compared with a 0.1% projection in April, though the gains will still only reach 0.9% in the following year.

The BOJ’s price projections once again highlighted how different Japan’s situation is from the U.S. and other countries, where fear of inflation has started to fuel expectations for an eventual withdrawal of monetary stimulus.

Central banks in South Korea and New Zealand this week signaled moves toward interest-rate hikes in coming months.

The BOJ, by contrast, is stuck with massive stimulus for the foreseeable future because it doesn’t see inflation hitting its 2% target anytime before 2024, which is as far in the distance as it forecasts.

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