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Japan sets sights on another record year of green bond issuance

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Japan sets sights on another record year of green bond issuance

Japan's green bond issuance will likely rise to a fresh record in 2021 as the coronavirus pandemic appears to be subsiding and corporate issuers could rush to raise funds for green projects ahead of a potential rebound in borrowing costs as soon as later this year, analysts say.

While the world's third-largest economy unveiled its goal to achieve net-zero emissions by 2050 in October last year, the nation's issuance of green debt picked up significantly in the fourth quarter of 2020. That offset the relatively low volume in the first three quarters as some issuers were diverted to sustainability or social bonds that primarily addressed the COVID-19 crisis, pushing the full-year issuance to a new record of US$10.66 billion, according to the Climate Bonds Initiative.

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"Companies could move to raise funds before the interest rates start rising, possibly later this year, as brokerage houses would go for this chance," said Mana Nakazora, ESG strategist at BNP Paribas in Japan. Nakazora said the 2021 volume could rise by 40% or more.

Although Japan's policy interest rate remains at minus 0.1%, long-term borrowing costs have been rising in recent months as the nation piles up debt to fight the pandemic. The 10-year Japanese government bond yield has risen about 8 basis points since the start of 2021. Nakazora added that local bond yields could rise further this year as the market has "high hopes" that the rollout of vaccines will speed up economic recovery.

Meanwhile, Yoshihiro Fujii, executive director of the Research Institute for Environmental Finance in Japan, estimates an increase of only between 10% and 20% in issuance this year, saying there are few big green projects in the pipeline.

Tamami Ota, a senior researcher at Daiwa Institute of Research Ltd., also expects "a modest increase" this year. Compared with sustainability and social bonds, the usage of proceeds from green bonds is less flexible and can only be spent on designated green projects, and that reduces the allure of green debt to some issuers, Ota said.

In Japan, the issuance of sustainability bonds, which allow issuers to allocate funds to environmental or social projects, totaled ¥600.5 billion in 2020, more than doubling the ¥257.0 billion in the previous year, according to Japan's Ministry of Environment. That competition of issuance away from green bonds in part explains the 23% year-over-year increase in green bond issuance in Japan in 2020, the smallest annual growth since the data began in 2014.

Rise in global rankings

An unexpectedly strong year of issuance made Japan the world's sixth-largest green bond issuer in 2020, up one notch from the previous year. It also surpassed the Netherlands and Sweden, which were larger issuers than Japan in 2019.

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"The prime minister's pledges have been very important to shape thinking around in Japan," Sean Kidney, CBI’s CEO said. "That will lead to continued growth."

After Yoshihide Suga, Japan's prime minister, made the carbon neutrality pledge, the nation's trade and industry ministry unveiled an energy-transition roadmap in December 2020, focusing on renewables and the adoption of hydrogen as alternatives to fossil fuel.

The Japanese economy is also emerging from the impact of the pandemic, growing by an annualized 12.7% in October-December 2020, following a record 22.9% annualized expansion in the previous quarter. There is also hope on an even faster recovery as Japan recently started vaccinating its population, which helped propel the benchmark Nikkei Stock Index to a 30-year high on Feb. 16.

As of Feb. 24, US$1 was equivalent to ¥105.96.