BoJ offers zero interest loans to banks investing in emissions reduction

The Bank of Japan will offer zero-interest loans to lenders who finance climate change-related projects as it becomes the last central bank to act on carbon emissions.

As part of the new program, which is expected to launch before the end of the year, banks will also be able to reduce the amount of deposits with the BoJ subject to a negative interest rate.

The arrangement effectively creates a subsidy for commercial banks that invest in emission reduction relative to other projects and could stimulate demand for green bonds.

Separately, the BoJ has not made any changes to its monetary policy, keeping overnight interest rates at minus 0.1%, and has promised to buy bonds if necessary to maintain yields on bonds. ‘State at 10 years around 0%.

Under Prime Minister Yoshihide Suga, Japan has pledged to achieve net zero carbon emissions by 2050, and the entire government is preparing new policies to achieve this goal.

“The bank does not chart a completely independent course on this matter. Rather, it will cooperate with the government on its green strategy, ”said Naoya Oshikubo, senior economist at Sumitomo Trust, ahead of the meeting.

“Overall, this is a big step forward for Japan and integrates support for climate change initiatives into the financial system,” he added. The BoJ announced the outline of the deal last month.

The details are similar to a BoJ program put in place last year that offered cheap loans to banks financing small and medium-sized businesses during the Covid-19 downturn.

The loans will have a term of one year but can be renewed an unlimited number of times, with the central bank committing to run the program until at least 2031. », Declared the BoJ.

In addition to paying zero interest, the BoJ said commercial banks could add double the amount of any borrowing under the program to their “macro supplemental balance” with the central bank.

The balance of the macro add-on pays an interest rate of zero instead of minus 0.1 percent. Japan’s commercial banks hold large excess reserves at the central bank, created as a balancing item for the BoJ’s bond purchases.

For an individual bank, the rule actually means that it will save 0.2% – 0.1% times two – when it grants an environmental loan under the new program.

The overall magnitude of the BoJ subsidy is unclear as it will depend on the adoption and decision of the central bank to reduce macro add-on balances granted for other reasons.

Eligible instruments would include green bonds, sustainability bonds and transition finance, the BoJ said. He did not define these terms, which are often used loosely to describe obligations related to environmental projects.

In its economic outlook, the central bank said Japanese production would remain below pre-pandemic levels for the time being, and called the outlook “very unclear.”

Slow progress on vaccines means Japan has not recovered as quickly as the United States or Europe, and there are few signs of inflationary pressure. The BoJ said the price risks were “biased downwards”.

For the year ending March 2022, the BoJ lowered its growth forecast from 4% to 3.8%, but raised its forecast for the following year from 2.4% to 2.7%.