Japan’s NIRP regime is finally over… at least for a handful of “virtuous” companies that plan on “investing” in “green” projects.
On Friday, the Bank of Japan – in addition to announcing that its main monetary policy levers remain unchanged, including short-term interest rates at minus 0.1% and long-term rates at around zero – outlined a new loan facility to banks lending to projects or companies tackling climate change, as the country – already one of the least polluting in the world – speeds up its shift to even cleaner energy and hasten efforts to reduce emissions. The new climate lending facility will allow the central bank to lend to commercial banks at zero interest rates for up to one year. And yes, getting a 0 interest in the country that brought us NIRP is supposed to be a reward. The loans can be rolled over without a limit under the facility, which is scheduled to last through fiscal 2030.
As an additional kicker, and adding to the brain damage of doing math in a NIRP nation, the BOJ will exempt reserves held at the central bank from the negative interest rates equal to twice the amount they lend out. The facility is available only for loans and investments in climate projects in Japan. To be eligible for interest-free loans, commercial banks must provide information about the loans they make in accordance with international standards.
Goldman summarizes the outline of the Green Financing Program as follows. Investments and loans eligible for financing include mainly
sustainability-linked loans/bonds with performance targets related to efforts on climate change, and
The lending interest rate is set at 0%, the same as the current Financing Program to Support Economic Growth and the COVID-19 Financing Program. However, as with the COVID-19 Financing Program, the Green Financing Program will be subject to twice as much as the amount of fund provisioned to be added to the Macro Add-on Balances in current accounts at the BOJ to which a 0% interest rate is applied.
The direct impact of the negative interest rate policy will be lessened by this. In principle, funds will be provided for one year, but unlimited rollovers are possible. This new program will likely start this year, and run until FY2030.
The BOJ also announced its strategy on climate change. The main focal point other than the new financing program was the decision to purchase foreign currency-denominated green bonds issued by governments and others. Specific eligible purchases and methods will likely be discussed going forward.
“Judging from the program outline, the BOJ intends to undertake a major climate financing program,” said Hideo Kumano, chief economist at Dai-ichi Life Research Institute.
Others disagreed, saying the facility was less ambitious than they had anticipated. They had looked for even stronger incentives, such as banks receiving 0.1% or 0.2% interest from the BOJ on the loans extended, or the facility covering even loans and investments made overseas.
Naturally, during his news conference, BOJ governor Kuroda indicated that the central bank’s focus is on promoting long-term investments in green projects, rather than producing a short-term spurt: “Dealing with climate change requires large investments and long-term commitments. It is our hope that the new facility will encourage businesses to start making plans for such investments, including hiring necessary talent,” Kuroda said, adding that the facility provides “sufficient incentives” for banks to increase green financing.
According to Nikkei, large banks are expected to be the ones in a position to take advantage of the new credit facility because they have more expertise in climate financing and are familiar with international disclosure rules. Smaller banks and regional lenders are expected to take time to catch up. Kuroda voiced hopes that regional lenders will also take advantage of the scheme, saying that emissions reductions are a national project.
The move came after the central bank said on June 18 that it would introduce the new facility this year. More specific details, such as the scale of the facility, will be hammered out by autumn and the program will begin by the end of the year.
The program is intended as a successor to the outgoing facility for promoting growth-supporting loans, which is due to end in June 2022 and which – in a country that has not experienced growth without constant central bank stimulus in 30 years – has obviously failed to support growth: under the growth-supporting lending facility, the BOJ provided 0.1% loans for up to four years to banks that have financed projects that are deemed to contribute to economic growth. The facility has an outstanding balance of some 7.5 trillion yen ($68 billion) in loans, a number that is at best laughable for the world’s 3rd largest economy.
The BOJ is moving in step with Prime Minister Yoshihide Suga’s government and its clean energy push – the government intends to cut greenhouse gas emissions by about half by 2030, ban a sale of new gasoline-powered cars by 2035, and aims to achieve carbon neutrality by 2050. Of course, as noted above, all of this is moot – Japan is already one of the cleanest nations in the world; it is China that should be pursuing such measures but it won’t for obvious reasons.
The Suga government has laid out a broad range of incentives to help grow industry around clean technology. Incentives are offered not just to corporate borrowers but also to venture businesses. The BOJ’s new climate facility could be made available to a broad range of investments, said Kumano.
The issuance of green bonds by Japanese companies has been on the rise, reaching almost $10 billion last year. But the amount still pales in comparison to those in the U.S. or Germany. The BOJ’s move is expected to help accelerate Japan Inc.’s transition to clean technology and make the country a leader in the climate field.