BoJ’s Kuroda questions market neutrality

July 27, 2021|Written by Hilal Atici|Bank of England, Bank of Japan, European Central Bank

Bank of Japan (BoJ) governor Haruhiko Kuroda has questioned the controversial principle of so-called market neutrality in a major speech outlining the central bank’s climate strategy. “I think that market neutrality needs to be interpreted with some latitude,” Kuroda told the Japan National Press Club, suggesting that ignoring the costs of climate change in resource allocation is not a neutral position.

Kuroda offered an overview of the negative externalities of climate change and a review of international actions by other central banks, emphasising that Asia accounts for about half of global carbon dioxide emissions and is also the region most vulnerable to the impacts of climate change.

“It is becoming more and more important for central banks to take necessary responses in line with their mandates,” he said, pointing to the introduction of climate criteria by the Bank of England into its corporate asset purchases and to the integration of climate considerations into the European Central Bank’s monetary policy strategy review.

Focusing on the BoJ’s mandate and the issue of market neutrality, Kuroda questioned the basis of the controversial principle. “If private sector investment or loans are decided without taking into account the ‘negative externalities’ caused by greenhouse gases, does this not affect the neutrality of resource allocation?” he asked.

While emphasising the need to avoid involvement in specific resource allocations “as much as possible”, Kuroda pointed to intensifying efforts to address climate change by government, business and society. “As this trend is expected to continue, providing support for such society-wide initiatives can be interpreted as falling within the broad definition of market neutrality,” he said.

Kuroda concluded with a review of the BoJ’s recent actions on climate, including the launch of a new green lending facility, pilot exercises in climate-related scenario analysis for large financial institutions, incorporating the TCFD framework into Japan’s Corporate Governance Code, and further investment in green bonds.

The BoJ’s reinterpretation of market neutrality follows extensive discussion within the bank’s policy committee and comes just two months after Bundesbank President Jens Weidmann reversed his blanket opposition to the introduction of climate-related criteria and considerations into ECB monetary policy.

Kuroda’s remarks are the latest example of key beliefs in central banking being questioned in the face of growing concern about the climate crisis as extreme weather events multiply around the world. The monetary policy response of Brazil and Mexico to drought-related food price inflation has highlighted the effects of climate change on price stability, while private banks now view climate change as the top emerging risk over the next five years, with serious implications for financial stability.

Faced with these threats, most central banks now believe that climate mitigation falls within their mandates.

This page was last updated July 9, 2024

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