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BoJ offers zero-interest loans to banks that invest in emissions reduction

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

Under the new scheme, expected to launch before the end of the year, banks will also be able to reduce the amount of deposits with the BoJ that are subject to a negative interest rate.

The arrangement effectively creates a subsidy for commercial banks that invest in emissions reduction over other projects and could spur demand for green bonds.

Separately, the BoJ made no changes to monetary policy, keeping overnight interest rates at minus 0.1 per cent, and promised to buy bonds as needed to keep 10-year government bond yields around 0 per cent.

Under Yoshihide Suga, the prime minister, Japan has promised to reach net zero carbon emissions by 2050, and the whole government is preparing new policies to achieve that goal.

“The bank is not charting a totally independent course on this. Rather it will co-operate with the government on its green strategy,” said Naoya Oshikubo, senior economist at Sumitomo Trust, before the meeting.

“Overall, this is a strong step forward for Japan and embeds support for climate change initiatives in the financial system,” he added. The BoJ announced the broad outlines of the arrangement last month.

The details are similar to a BoJ scheme brought in last year that offered cheap loans to banks financing small and medium-sized companies through the Covid-19 downturn.

The loans will have a one-year tenor but can be rolled over an unlimited number of times, with the central bank pledging to run the scheme until at least 2031. “Effectively, counterparties can receive long-term financing for their eligible investment or loans,” said the BoJ.

In addition to paying a zero interest rate, the BoJ said commercial banks could add twice the amount of any borrowing under the scheme to their “macro add-on balance” with the central bank.

The macro add-on balance pays an interest rate of zero instead of negative 0.1 per cent. Japan’s commercial banks hold large excessive reserves at the central bank, created as the balancing item to BoJ bond purchases.

For an individual bank, the rule effectively means they will save 0.2 per cent — 0.1 per cent times two — when they make an environmental loan under the new scheme.

The overall scale of the subsidy from the BoJ is not clear because it will depend on take-up and whether the central bank moves to reduce macro add-on balances granted for other reasons.

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Eligible instruments would include green bonds, sustainability-linked bonds and transition finance, said the BoJ. It did not define those terms, which are often used loosely to describe bonds linked to environmental projects.

In its economic outlook, the central bank said Japanese output would stay below pre-pandemic levels for the time being, and described the outlook as “highly unclear”.

Slow progress on vaccines means Japan has not recovered as fast as the US or Europe and there is little sign of any inflationary pressure. The BoJ said price risks were “skewed to the downside”.

For the year to March 2022, the BoJ nudged its growth forecasts down from 4 per cent to 3.8 per cent, but raised its forecast for the following year from 2.4 per cent to 2.7 per cent.

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