With investor interest in sustainable finance growing globally, Japan is encountering a rare opportunity to turn Tokyo into one of the leading green financial hubs in Asia.
Since the 1980s, Japan has been struggling to transform Tokyo as one of the top global financial centers. Proponents, even today, claim that Tokyo deserves this status due to the sheer size of its economy and stock markets, as well as the international status of the Japanese yen.
But Japan’s advantages have eroded over time. China became the second largest economy after the United States in 2010, and is expected to surpass the United States in the next decade or so. The Tokyo Stock Exchange has been lagging behind several stock exchanges in mainland China and Hong Kong in terms of market capitalization, while the top two positions continue to be dominated by the New York Stock Exchange and NASDAQ.
Over the past five years, mainland China has gained traction among global investors because of a rising number of technology-intensive start-up and unicorn companies, despite the fact that some uncertainties have recently emerged on the tighter antitrust and data security regulations over fintech companies.
Meanwhile, a growing number of middle- and high-income people, along with the growth of institutional investors and the asset management industry, has promoted capital market development in China. In addition, currencies such as the Chinese renminbi, together with the Australian dollar and the Canadian dollar, are gaining a certain level of popularity as alternative reserve currencies. Digital renminbi is expected to be issued around the Beijing 2021 Winter Olympic Games and is already attracting global attention.
The growing alarm about climate change, along with widespread global initiatives toward a net-zero economy, has awakened the world to the urgent need to “green” existing loan and securities portfolios. It is also spurring a move towards significantly growing the size of sustainable financial markets in order to finance green projects and new green technology.
Sustainable financial markets need to rise from the current annual pace of $2.3 trillion globally to around $5 trillion by 2030, and maintain close to this amount until 2050, according to the recent International Energy Agency’s net zero scenario report. Asia in particular, as one of the fastest growing regions, faces the biggest challenges in transforming into a low-carbon economy, given its excessive dependence on coal power and rising demand for energy to fuel future growth.
Japan has the potential to become one of the top regional leaders in the sustainable finance industry, thanks to abundant financial resources and the presence of some technologically-advanced and innovative companies that can contribute to decarbonization.
But that is not enough. Japan’s government, following many other leading economies, must immediately start issuing green sovereign bonds with diverse maturities. While these green bonds allocate its proceeds to green projects, the government should also actively issue green sustainability-linked bonds whose coupon rates vary depending on the progress relative to the pre-set environmental targets, such as emission reduction.
These bonds could help to develop the green yield curve, which could subsequently form a basis for pricing green local government and corporate bonds and bank loans. Green sovereign bonds also help to mitigate “green-washing” if the government adopts a uniform, clear classification of green activities that would lead to a 46% cut by 2030 (relative to the 2013 level) and the net zero emission target by 2050.
This could contribute to standardizing green label financial products in Japan, therefore attracting more long-term global investors domestically and from abroad. Such a classification on green activities will help the government’s current efforts — prioritizing on classifying transition activities and developing a global standard on transition activities — to gain credibility.
Transition activities should be defined as those that are not considered green but are subject to time-bound paths towards green or substantial de-carbonization targets in view of the government’s emission goals.
The Japanese government’s recent decision to apply climate-related corporate disclosure in line with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations towards companies to be listed in the “Prime” segment of the Tokyo Stock Exchange from next April is a welcome step, but compliance and accountability are only on a voluntary basis.
It is worthwhile to look into a near-term plan to make it mandatory and applicable to all listed companies. It is also imperative to require companies to disclose actual carbon emission time series data including life cycle assessment and at least the 2030, possibly longer-term, emission targets.
The Bank of Japan’s recent announcement to provide cheap longer-term finance to commercial banks addressing climate change issues is a good starting point. The Bank, however, must take further steps by examining how to green their huge loan and securities portfolios and their asset purchase program.
These comprehensive efforts could help Tokyo to earn a reputation as one of the regional leaders in the green field and contribute to developing sustainable finance markets in Asia. The European Union is already taking the lead as a global leader. China, Singapore, Hong Kong and the United Kingdom are moving fast to develop top sustainable and green finance hubs.
In the face of intensifying competition in Asia and globally, there is no time for Japan to relax.
Sayuri Shirai is a professor at Keio University and a former Policy Board member of the Bank of Japan.
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