The Bank of Japan (BoJ) has announced that it will use targeted refinancing operations to support the transition to a carbon neutral economy, making it the first major central bank in the world to do so.
In a statement released Friday following a meeting of the Bank’s monetary policy committee, the Bank said that it would “provide funds to financial institutions for investment or loans that they make to address climate change issues.”
“Climate change issues could exert an extremely large impact on developments in economic activity and prices as well as financial conditions from a medium- to long-term perspective,” the BoJ said.
The BoJ’s new lending facility will replace an existing scheme that provides funds to banks at a preferential rate (currently -0.1%) when they lend to projects in new growth areas. That scheme specified a list of 18 ‘growth areas’ identified by the bank in conjunction with economic partners, but allowed banks to pick and choose within these areas, thus preserving the controversial principle of so-called ‘market neutrality’. The new lending facility is expected to operate along similar lines.
Refinancing operations are a core monetary policy tool providing liquidity to credit institutions. Following the 2008 financial crisis several central banks extended the maturity of their lending under these programs, and have targeted this lending by offering reduced rates for bank refinancing of loans to particular segments of the economy.
Leading think tanks have repeatedly called for the introduction of climate considerations into targeted refinancing operations, and civil society groups have offered proposals for the greening of the European Central Bank’s (ECB’s) Targeted Longer-Term Refinancing Operations (TLTROs) and the Bank of England’s Funding for Lending Scheme (FLS).
While several smaller central banks, such the Bangladesh Bank, have introduced sustainability-related refinancing programs in the past, the BoJ is the first major central bank to do so.
The details of the BoJ measure will be decided next month and the new lending facility is expected to be operating by the end of the year. Climate campaigners will be watching closely to ensure that any list of climate-targeted areas is consistent with environmental objectives and the Paris Agreement target of keeping global heating below 1.5C.
This page was last updated June 22, 2021
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