The government needs to set up a fund of up to ¥10 trillion ($96 billion) to invest in the green and digital transformation of society that is a key goal for Prime Minister Yoshihide Suga, according to one of the prime minister’s advisers.

“Creating this will be a major part of the upcoming extra budget,” said Mitsumaru Kumagai, chief economist at Daiwa Institute of Research Ltd. in an interview.

The third additional budget this year is likely to contain overall real spending of around ¥15 trillion, added Kumagai, who was appointed as one of six new advisers to Suga last month.

Kumagai declined to put his own figure on how much it will cost to achieve the nation’s new goal of becoming greenhouse gas neutral by 2050, but he cited a study indicating that ¥340 trillion of public and private sector investment would be required, or ¥11 trillion each year. He didn’t specify which study he was referring to.

“What’s key for the Japanese economy now is whether we can strengthen our growth strategy and conduct reforms, and whether the economy can truly digitalize and become green,” said Kumagai.

The comments indicate that the Suga administration will try to use the extra budget to make a clear step in the direction of its 2050 climate pledge. The government is currently putting together the supplementary spending to keep the economy on a recovery path amid a resurgence in COVID-19 virus cases at home and abroad.

ESG investment in Japan is around 20% of total institutional investment, still lagging far behind the corresponding European Union figure of 50%, Kumagai said.

“What’s needed first is to make regulatory reforms surrounding renewable energy and ensure the sector grows,” said Kumagai.

Reforms he says should be implemented to help the nation meet its climate pledge include:

  • Lifting a solar panel ban on agricultural land
  • Tax breaks to support geothermal and wind power development
  • A new system for direct power trading
  • Support for electric vehicles and the next generation of batteries and hydropower
  • Carbon emission reduction requirements for industry
  • Tax breaks for households that invest in businesses that meet ESG criteria

With virus cases at record levels in Japan and the possibility of new restrictions on activity, Kumagai also warned that the economy could start shrinking again if another state of emergency was declared.

According to his calculations, a nationwide declaration lasting a month would slice ¥3.3 trillion off gross domestic product and push up unemployment by 1.2 percentage points.

If that could be avoided and a balance struck with limiting the spread of infections, then the government’s Go To Travel subsidies would be the most effective way to stimulate the economy and create employment, Kumagai said. The effectiveness of the travel campaign was around 3.6 times the ¥1.35 trillion spent on it, he added.

The government’s ramped-up furlough program should also be extended beyond December, he said.

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