The Bank of Japan is also getting greener

The central bank of the third largest economy will encourage investments by companies against climate change. But in Japan there is an important difference to the eco-activities of other central banks.

Bad air in Kawasaki: Japan's economy is highly industrialized.

Dhe Bank of Japan wants to take action in environmental protection and make funds available to encourage investments by private companies against climate change. The Central Bank’s Monetary Policy Council decided on Friday.

The bank justifies the new measure with the fact that climate change could have a very large influence on economic activity and prices in the medium to long term. The announcement says: Financial support from the bank for measures against climate change will help to stabilize the economy as a whole in the long term. At the same time, the central bank maintained the negative key interest rate. She extended special aid programs to support corporate financial health during the Covid pandemic by six months to March 2022.

With its commitment to environmental protection, the Japanese central bank follows the Japanese government under Prime Minister Yoshihide Suga, who has set the country’s climate neutrality as a goal by 2050. “Parliament and the government are primarily responsible for achieving this goal,” Central Bank Governor Haruhiko Kuroda told journalists in Tokyo. With the new financing instrument, however, the central bank can react flexibly to changes in the external environment with regard to climate change.

However, no green monetary policy

At the same time, the bank is getting closer to the efforts of the European Central Bank and the Bank of England, among others, to use monetary policy for environmental policy in addition to price stability through purchases of “green bonds”. In contrast, the Japanese monetary politicians expressly emphasized that they want to observe the market neutrality of monetary policy. The central bank therefore does not build environmental protection into the traditional means of its monetary policy. Rather, it wants to make financial resources available to banks so that they can finance investments or loans against climate change. Kuroda was skeptical about a targeted purchase of green bonds.

The scope and conditions of the eco program are not yet known. The Bank of Japan plans to start the green financial aid later this year and will provide more details after the July meeting. The new environmental program will replace a funding program that the central bank wanted to strengthen the foundations for economic growth in Japan. The central bank launched this previous program “temporarily” eleven years ago to support productivity and demand in Japan. Most recently, the bank lent 5.3 trillion yen (40 billion euros) to 62 Japanese credit institutions in the medium term in this program.

Most recently, the bank stopped buying shares

In terms of monetary policy, the Japanese central bank remained cautious and remained true to its expansionary course. Based on exports, the bank expects the economy to recover from the Covid pandemic, but still sees Japan in a difficult position. The short-term key interest rate will remain at minus 0.1 percent and the rate targeted for the ten-year return at zero percent.

The bank expressly emphasized that it could loosen monetary policy further in the event of a deterioration. Only at first glance does this appear to be in contrast to other central banks such as the American Federal Reserve, which are slowly initiating the exit from the pandemic-related special measures. But the Bank of Japan had already given itself more flexibility in purchasing exchange-traded equity funds in March. In May, for the first time since 2013, the bank had not bought shares in a month.

In Japan, economic hopes are aimed at the corona vaccination campaign picking up speed. More than 1 million doses a day were vaccinated recently. As of this week, all residents aged 18 or over can be vaccinated. Private consumption could thus recover in a short period of time.

Kuroda believes it is possible that companies could then pass on price increases for preliminary products to customers. However, this is not as easy to do in Japan as it is in Europe or the United States, said the central bank governor and reminded that Japan had not reached the inflation target of 2 percent even before the pandemic. Currently, the inflation rate in Japan is close to zero percent.