Will BOJ’s fund program be effective in promoting decarbonization?

The Yomiuri Shimbun

14:40 JST, July 20, 2021

The Bank of Japan has compiled a preliminary outline of a funding measure that will make it easier for private financial institutions to finance and invest in companies working to address global warming.

The central bank said the interest rate on such loans to private financial institutions will be set at 0%. The term of the loans is one year, but they can be refinanced through fiscal year 2030, making long-term utilization possible. The central bank plans to start the program within this year.

It is important to make the system highly effective while maintaining the neutrality required of a central bank.

The government aims to reduce greenhouse gas emissions to net zero by 2050, and decarbonization has become a major issue for society as a whole. The supply of funds by the BOJ could be seen as aiming to support this goal through a separate channel.

Global warming will deal a blow to the economy as a whole. If natural disasters such as floods occur frequently, it will cause tremendous damage to businesses. The value of facilities that emit a large amount of carbon dioxide, such as coal-fired power plants, will decline, and more companies may likely incur losses.

It is understandable that the BOJ is aware of global warming as a risk. However, it should keep in mind that if it focuses on a particular sector, it may undermine the neutrality of the central bank and distort private economic activities.

As the prescribed fundamental role of the BOJ is to stabilize prices and the financial system, there is the argument that decarbonization measures are the job of the government.

Explaining the reason for introducing the latest measure, the BOJ said that climate change could negatively impact prices and financial systems from a medium- to long-term perspective.

Globally, responses by central banks to climate change are not in alignment. While a number of central banks, mainly European ones such as the European Central Bank and the Bank of England, are trying to encourage decarbonization through monetary policies, the U.S. Federal Reserve has yet to break from its careful stance on the issue.

The BOJ should meticulously explain the purpose of the measure.

Japan’s central bank says that it will leave it to financial institutions to decide whether the loans and investments to be covered in the program are conducive to decarbonization. The central bank said it gave consideration to concerns about its excessive intervention.

In this regard, it will be necessary to examine whether the funds provided have been used appropriately. There is strong demand for funds to strengthen measures to address global warming, with the auto industry accelerating the development of electric vehicles and the steel industry developing technologies such as hydrogen-based steel production.

When providing funds, the BOJ must require financial institutions to disclose adequate information. It will also be important to examine how effective the program is.

— The original Japanese article appeared in The Yomiuri Shimbun on July 20, 2021.