1. Japanese government’s Green Growth Strategy
Japan has lagged the world in its efforts to tackle climate change. However, to keep up with the global trend towards greening, in December 2020, the Japanese government, under the Suga Administration, launched a green growth strategy aimed at carbon neutrality by 2050. In April 2021, a new initiative was announced to reduce greenhouse emissions by 46% in 2030 (as compared to 2013 levels) and furthermore, to challenge the 50% reduction mark. And in June, the "Green Growth Strategy through Achieving Carbon Neutrality in 2050" was announced. This is a revised version of the initial release in December 2020, and provides a more detailed path to carbon neutrality by 2050.
As part of its green growth strategy and goal to achieve carbon neutrality by 2050, Japan has set a reduction target of greenhouse gas emissions in 2030 to 46% of 2013 levels. The electric power sector has begun decarbonization and the non-power sector has called for electrification, hydrogenation and energy conservation (CO2 emissions as of 2019: 440 million tons by the electric power sector, 280 million tons by industries, 200 million tons by the transportation sector, 110 million tons by households). In order to achieve carbon neutrality in 2050, Japan must pursue all options for decarbonization including the introduction of hydrogen/ammonia, CCUS/carbon recycling, nuclear power and other forms of renewable energy as demand for electricity will increase by 30 to 40% due to the decarbonization process.
As for the power source composition, thermal power will be significantly reduced from 76% (2019) to 41% (2030), while renewable energy will be raised from 18% (2019) to 36-38% (2030) and to 50-60% in 2050. Hydrogen and ammonia will be increased to 1% (2030) and 10% (2050). Furthermore, nuclear power will be increased from 6% (FY 2019) to 20-22% (FY2030) as shown in Figure 1.
Considering that it was at 25% in 2010 before the Great Eastern Japan Earthquake, this is an achievable goal as some plants can be restarted, but public opinion must be carefully monitored.
Among renewable energy sources, Japan plans to focus on offshore wind power. The potential for offshore wind power in Japan is high as it is an island country surrounded by the ocean, and is a trump card for renewable energy as a main power source. As offshore wind power will cost hundreds of billions of yen and require tens of thousands of parts, it will have a huge ripple effect not only on wind power generator-related manufacturers, but also on related industries such as general contractors, electric power companies, and trading companies. The global offshore wind power market is a growing industry that is expected to generate 562 GW of electricity (24 times the current level) and will lead to over 120 trillion yen in investments worldwide by 2040. Although Asia including Japan has fallen behind in this field, it is expected that Asia will comprise more than 40% of the world’s market share by 2030. Thus, rapid growth is expected in the future. The Japanese government aims to: (1) generate 10 GW by 2030 and 30-45 GW by 2040 from the current creation stage, and (2) to form a strong supply chain in Japan by increasing the domestic procurement ratio to 60% by 2040 through an industry-government- academia collaboration, and (3) reduce power generation costs to 8-9 yen/kWh by 2030-35 (It is about 30 yen/kWh as of 2021).
Furthermore, Japan has defined hydrogen as a key carbon-neutral technology that is expected to be used in a wide range of fields such as power generation (fuel cells), transportation (automobiles, ships) and industry (steel, chemicals). Japan formulated the world's first hydrogen strategy in 2017 and is technologically ahead in multiple fields. Thus, the transition to a hydrogen-based society will ultimately lead to the creation of a decarbonized society. The Japanese government has set a hydrogen production target of 3 million tons by 2030 reducing the cost to 30 yen/ Nm3 (less than 1/3 of the current selling price) and to 20 million tons by 2050 by further lowering the cost to 20 yen/ Nm3 or less.
Under the green growth strategy, we expect to see growth in certain industries such as offshore wind power, solar power, geothermal power, hydrogen/fuel ammonia, automobiles/storage batteries and housing as we move towards a decarbonized society. The economic effect is expected to be about 140 trillion yen in 2030 and about 290 trillion yen in 2050. Meanwhile, the Japanese government has launched various support measures in anticipation of the large-scale economic effects in the transition to a decarbonized society.
In terms of the budget, the government has announced the creation of an unprecedented 2 trillion yen Green Innovation Fund to support companies involved in green innovation over the next 10 years. The 2 trillion yen will be used to induce R&D and capital investment (of 15 trillion yen) by the private sector. And on taxation, the government will introduce a tax scheme to promote investment for carbon neutrality, expand the scope of the R&D tax, and create a special case by raising the deduction limit of loss carryforwards for companies investing in carbon neutrality, to further encourage private investment. We expect that any short or medium-long term decarbonization investments by companies will be strongly supported by the government. On the financial side, government-affiliated financial institutions will play a key role in the transition and innovation towards decarbonization and will actively supply funds. The government will also focus on creating financial and capital markets conducive to the realization of carbon neutrality, including a market for green bonds. On the regulatory front, the government will not hesitate to introduce carbon pricing market mechanisms contributing to growth and competitiveness of the industry, innovation and further investment. By pricing CO2 emissions and imposing costs, businesses and individuals will reassess their investment and spending behavior. And should government use the proceeds from the carbon tax to support the development and introduction of innovative technologies, we should see an acceleration of the shift away from existing technologies.
2. The Green Operation announced by the Bank of Japan
At the monetary policy meeting held on July 15-16, 2021, the Bank of Japan issued a draft outline promoting financial institutions to invest in alleviating climate change. It is expected to kick off by the end of 2021 and is continuous until 2030. This new system (hereunder the “Green Operation”) will supply funds under favorable terms to financial institutions supporting measures against climate change. The outline is as follows:
The BOJ will lend yen at zero interest to financial institutions engaged in environmentally friendly investments and loans (e.g. green loans, green bonds)
As a preferential measure, the BOJ can abolish the application of negative interest rates in certain cases (For example, the BOJ will apply zero interest on double the loan amount that private banks have at the BOJ under the supplementary deposit account.)
As a general rule, the term of the loan is one year and can be rolled over as many times as the borrower desires (This scheme, in effect, is a zero interest rate loan issued to borrowers engaged in environmentally friendly projects, by the BOJ for an unlimited amount.)
Some central banks, such as the ECB and Band of England, have also imposed measures against climate change risks (such as plans to purchase corporate bonds in consideration of issuers’ response to climate change). The BOJ has followed such measures. It is also acting in support of the Japanese government's goal of carbon neutrality.
There is no clear standard for what constitutes a green loan, and the BOJ is aware that such a classification (taxonomy) has not yet been established globally. Each financial institution is required to classify and assess its assets based on its own standards. The Bank of Japan is expected to eventually determine whether financial institutions' investments and loans are green or not, based on the information disclosed in the TCFD framework.
3. Implications for Japanese Corporations and the Markets
Even Japanese companies, which are generally considered to lag its western peers in terms of decarbonization, are gradually accelerating their efforts in response to Prime Minister Suga's "2050 Carbon Neutral Declaration" last fall. There have been declarations of zero CO2 emissions by companies in the energy and steel industries such as JFE Holdings and JERA, which were often criticized as industries with a large environmental load. The revision of the Corporate Governance Code announced in June 2021 requires listed companies to actively respond to sustainability issues such as climate change, efforts to decarbonize. Thus, we see the movement accelerating going forward.
In addition, at the 2021 shareholders' meetings, there were more proposals for climate change than usual. In March, the NPO Climate Network submitted a shareholder proposal to Mitsubishi UFJ Financial Group (MUFG) requesting the formulation and disclosure of a plan that describes the management strategy for investing and lending in line with the goals of the Paris Agreement. Although it was rejected at the June AGM, it became a hot topic. MUFG made a carbon neutral declaration on May 17, and disclosed that it would participate in the Net-Zero Banking Alliance (NZBA) for the first time as a Japanese bank, and that the group's greenhouse gas emissions would be zero by 2030. As a result, the company presented a strong response to climate change before the June general meeting. Efforts by the Climate Network have helped transform companies. We believe that shareholder proposals will continue to give a boost to corporate transformation.
It will not be easy for most companies, including those in the energy and steel industries, to reduce greenhouse gas emissions to virtually zero by 2050. To achieve such a difficult goal, it would require the concerted effort of the government, the Bank of Japan and companies. ESG-related financial products are gaining popularity not only among institutional investors but also among individual investors in Japan. We believe companies that are steadily advancing climate change goals while making maximum use of supportive measures by the government and the Bank of Japan, are likely to be preferred by the market.