MNI STATE OF PLAY: Spurring Climate Lending Tops BOJ's Agenda

A jolt to climate change lending could be a new front in the Bank of Japan's efforts to spur the economy as it unveils its latest policy stance at the end of the week in a two-day meeting otherwise expected to leave the main settings on hold.

The BOJ is not expected to pick winners and favour a specific industry or sector, or micro-manage the policy, among potential tools to fight climate change. The BOJ signalled the new climate change plans in June, highlighting the medium- to long-term impact.

The BOJ may instead aim to increase incentives for banks to extend loans with longer durations, and make investments in areas that address climate change issues, leaving much of the decision-making process, and prudential guidelines, to the commercial banks.

LOAN DETAILS AWAITED

Suggestions are loans may be more than one year in length and the BOJ may set a surprisingly large total amount for overall loans.

Bank officials are considering the details of new measures, and any accommodative policy will come on top of loan measures aimed at wider economic growth – an existing loan pool that stood at JPY5.3 trillion (USD48 billion) through late May.

As well, the BOJ will likely allow banks to hold associated excess reserves at zero percent, not -0.1%, instead of paying interest rate on any of the associated loans.

GREEN BONDS

Overall, the BOJ will offer support for green and climate change initiatives, including consideration of buying green bonds, to drive economic growth. But observers of the BOJ said any new measures in this area would not hamper the smooth conduct of interest rate policy and money market operations.

As well, the BOJ may discuss how it will count investments in green bonds overseas by commercial banks and broader issues on "transition financing" as technologies change.

The BOJ has own foreign reserves and can buy green bonds with the funds.

Also, purchases of green bonds are consistent with the recent decision by EMEAP (Executives' Meeting of East Asia and Pacific Central Banks). EMEAP announced on Monday that the members have reached an agreement to promote investment in green bonds through the Asian Bond Fund (ABF).

They said that the decision is aimed at helping to catalyze a further deepening of local currency-denominated green bond markets in the region.

OUTLOOK FORECASTS

The BOJ's median forecast for inflation this fiscal year, ending March 31, 2022, will be raised from April's +0.1% on the back of higher crude oil prices from a year earlier when they publish the quarterly Outlook Report on Friday.

The median forecast for GDP growth this fiscal year will be lowered slightly from +4.0% in April in the wake of weaker private consumption caused by the ongoing state of emergency to tame the spread of COVID-19.