© Jezael Melgoza
Japan’s financial institutions need to strengthen the connection between climate stress tests and borrowers’ transition plans, according to an assessment by the Bank of Japan (BoJ) and Financial Services Agency (FSA).
Stress tests conducted by Mizuho, MUFG, and Sumitomo Mitsui showed that credit losses were low compared to profitability, but the report by regulators BoJ and FSA said that the methodology and data used by the financial institutions to run scenarios should be improved.
“Major issues and challenges involve assessing how the gaps between the transition strategies of individual borrowers and the macro-level assumptions in scenarios can affect scenario analysis,” BoJ and FSA wrote.
Risks likely underestimated due to lack of data
The three banks conducted the risk analysis using in-house models. They noted that the analyses rely on sector-level data based on long-term modelling rather than the transition plans of their borrowers, as the information is not comparable and there are many discrepancies.
“Such discrepancies between climate scenarios and individual borrowers’ transition strategies may impact the outcomes of scenario analysis,” the BoJ wrote.
The climate scenario analysis was the second analysis conducted by the Japanese banks. It focused only on short-term transition plans to 2030 and not on physical risks. Three scenarios were considered by the banks:
- No additional climate policies beyond current measures
- Strict reductions in emissions and policies that limit temperature increase to 1.5 °C
- The same level of emissions reduction but with a delayed adaptation by corporations and households, which results in price increases and declining profitability.
While the FSA and BoJ said the losses would be small, credit losses in scenario three were estimated to be 2.3 times those in the first scenario.
Japanese regulators criticised for lack of detail in findings
Sayuri Shirai, a professor at Keio University and former board member of the BoJ said that the central bank did not quantify the findings and the lack of numbers on things like capital ratio and nonperforming loans mean that the picture that they provided was incomplete.
“A lot of banks do not get any impact from this analysis,” she said.
And while the regulators imply there is uncertainty around the data, they could have been clearer that these scenarios are likely underestimating losses as a result, because otherwise stakeholders might think“why should we worry?”, she added.
“It’s very challenging to estimate [losses] but [climate change] impact is getting bigger. That kind of sense of urgency [should] be reflected in a clearer way”.
Shirai also criticised the BoJ and FSA for only having three banks conduct the scenario analysis and not including a larger number of banks, as other countries in the region have done. The Bank of Korea, for example, has conducted climate stress tests for 14 financial institutions, including seven banks.
Because the BoJ has a green loans scheme, they already require climate disclosures from numerous Japanese banks.
“They can try to be a bit more ambitious, every time they do this kind of analysis, and next time, increase the coverage,” Shirai said.
This page was last updated August 12, 2025
Written by
Moriah Costa is the Editor-in-Chief of Green Central Banking and has over a decade of experience writing about banking and finance. She is an award-winning American journalist based in Paris and has written for major international publications, including Reuters, The Guardian, and S&P Global. Having grown up in water-stressed Arizona, she has always had a strong interest in bringing awareness to climate and environmental issues.
