Japan’s First Sovereign Green Bonds Expected to Attract Healthy Demand

Reuters

16:20 JST, February 13, 2024

TOKYO, Feb 13 (Reuters) – Japan’s government is set to issue its first tranche of bonds to finance development of clean energy resources this week, with investors expecting healthy demand owing to the scarcity of yen-denominated green bonds.

The finance ministry has said it will sell 10-year climate transition bonds on Wednesday and another batch of 5-year bonds later this month. The financing is meant to help the nation cut greenhouse gases to zero by 2050 and become a carbon-neutral society.

Prices of these green bonds in the “when-issued” market, which is the market for securities yet to be issued, show the climate bonds command a premium over regular Japanese government bonds (JGBs).

Yields on the 10-year climate transition bonds were 0.655% on Tuesday in the when-issued market, compared with 0.72% on 10-year JGBs. The finance ministry will sell about 800 billion yen ($5.35 billion) of these 10-year green bonds.

“If investors buy the climate transition bonds for the purpose of making green investments, they are unlikely to sell the securities in the market promptly,” said Naoya Hasegawa, senior bond strategist at Okasan Securities.

The demand from sustainability-focused funds and investors will keep these bonds at a premium, and yet their scarcity will also mean less churn and less secondary-market liquidity, analysts said.

“If the bonds witness stable demand in the primary market and investors can sell them whenever they want, that would be ideal,” said Keisuke Tsuruta, a senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.

“But it is not certain if the market will turn out to be that way.”

The bond sale is part of Prime Minister Fumio Kishida’s plan to sell 20 trillion yen of bonds to help finance projects such as developing low-cost wind power generators and airplanes that use alternative fuels.

The finance ministry plans to sell another 800 billion yen of five-year climate bonds on Feb. 27, which will be followed by sales of 1.4 trillion yen of such bonds in the fiscal year starting in April.

Together with Japanese companies, the government aims to make investments worth 150 trillion yen in green energy projects over the next decade.