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Japan green bond issuance in 2020 may fall from record high as COVID-19 rages

Japan's green bond issuance may drop this year for the first time in at least seven years, with many climate-responsible projects likely to take a back seat while companies focus on surviving the economic downturn due to prolonged coronavirus interruptions, experts said.

The world's third-largest economy is likely to issue $4.5 billion to $5.0 billion worth of green bonds in 2020, according to an estimate by Climate Bonds Initiative, or CBI, a U.K. nonprofit organization that created the green bond standards. It will be down from $7.2 billion last year, the highest volume recorded since 2014, when aggregate data became available.

Despite the nation issuing $2.7 billion worth of green bonds from January to March, the strongest quarter on record, the CBI's estimate suggests a sharply lower volume for the rest of 2020. The volume in the first quarter was largely driven by a few sizeable bonds, such as a ¥5 billion 10-year green bond Tohoku Electric Power Company Inc. issued in February. In April and May, only $533 million of green bonds were issued, according to CBI data.

Japanese companies have been hit by a monthslong lockdown due to the coronavirus pandemic and corporate bankruptcies have been rising. "For them, ESG activity is an extra [business], not the main one," Yoshihiro Fujii, executive director of the Research Institute of Environmental Finance in Japan, told S&P Global Market Intelligence. "There is no doubt that the issuance [of green bonds] this year will drop."

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In 2019, Japan was the world's seventh-largest green bond issuer but accounted for only about 3% of the global issuance of green bond and loans totaling $257.7 billion, according to the CBI. Major issuers include financial institutions such as Mitsubishi UFJ Financial Group Inc., as well as government-backed entities such as Japan Railway Construction, Transport and Technology Agency and Japan Housing Finance Agency.

Coal use may limit green finance

In the long run, some analysts said the growth prospects of green bonds in Japan will likely be limited by a national energy policy still reliant on coal power.

"A significant growth of the green bond market here is unlikely unless demand for more green projects is developed by a policy change," Fujii said.

Under the Paris Agreement on climate change, governments are seeking a significant reduction in greenhouse emissions, prompting global enterprises to develop environmentally friendly projects such as renewables and encouraging banks to finance them by issuing green bonds.

Fujii pointed out that Japan's Ministry of Economy, Trade and Industry calls for renewables to generate 22% to 24% of its electricity mix in the fiscal year starting April 2030. That is lower than the 26% target for coal-fired power generation, the second-largest fuel source following liquefied natural gas.

"How can Japan drop coal [power generation], which is cheaper, and increase renewables?" said Kazuo Ishikawa, a policy analyst at the Institute for Industrial Growth and Social Security Policy.

"That will never happen," as it would limit the growth of the green bond market, he added. Ishikawa worked for the trade and industry ministry for nearly 20 years.

The ministry estimates generation cost to be ¥12.9 per kWh for coal, compared with ¥12.5 to ¥16.4 per kWh for solar power over the next 10 years.

"The question is whether other segments [apart from renewables] can be developed for green bonds," an official at Japan's Environment Ministry said, declining to be named as he is not authorized to speak to the media. He added that he expects renewables to remain a major source of green bond issuance for a while.

CBI CEO Sean Kidney said, "Japan has shown good progress in green bond issuance for the past couple of years. It will be interesting to see how resilient the Japan green bond market is."

As of June 19, US$1 was equivalent to ¥106.94.