BoJ green loans scheme gets underway

The Bank of Japan (BoJ) has made the first auction in a much-anticipated new green loans scheme, providing zero-interest financing to lenders supporting action to address climate change.

Loans totalling 2.048tn yen (US$17.9bn) have been dispersed which will mature in January 2023, the BoJ revealed in a statement. The bank has previously said that similar disbursements will be offered about twice a year, and the loans will be able to be rolled over until 2030. Governor Haruhiko Kuroda has also said it will make adjustments to the scheme if needed.

In order to take part in the initiative, which the BoJ announced last year, institutions are required to publish information in accordance with the recommendations of the Taskforce for Climate-related Financial Disclosures (TCFD). They must also disclose the criteria they have used to determine which investment or loans contribute to addressing climate change, and in doing so refer to the relevant national or international standards.

Kuroda has justified taking action on climate by arguing that doing so falls within the BoJ’s price stability and financial stability mandates.

“From a central bank standpoint, with its mandate of achieving price stability and ensuring the stability of the financial system, supporting the private sector’s efforts on climate change will help stabilise the macroeconomy in the long run,” he said.

The BoJ does not have a secondary mandate to support the government’s economic policies, unlike the European Central Bank and Bank of England which have both cited their dual remits as requiring them to take climate concerns into consideration.

In offering more favourable terms to institutions based on climate criteria, the BoJ is recognising the limitations of the so-called market neutrality principle which usually guides central banks’ monetary policy operations. Kuroda has said that market neutrality “needs to be interpreted with some latitude” and that ignoring the costs of climate change in resource allocation is not a neutral position. He has however stressed that specific allocative decisions will be left to the lenders themselves.

The BoJ’s more sophisticated interpretation of market neutrality is increasingly being adopted by its counterparts elsewhere. An internal review of the BoE’s corporate bond purchase scheme acknowledged that by attempting to minimise the impact of the scheme on borrowing costs across different sectors, it was actually reinforcing the market’s failure to accurately price climate risks.

Although the BoJ is not alone in its willingness to deploy monetary policy to support private sector efforts on climate change, it is unusual among G20 central banks in justifying its actions based on its core price stability and financial stability functions. Other central banks may be watching its actions closely as they contemplate how to deliver their own mandates as climate becomes an ever-bigger factor.