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Japan to push back issuing first sovereign green bond despite emissions goal

Japan is unlikely to tap into the sovereign green bond market for at least a few more years despite its recent pledge to go carbon neutral by 2050, experts say, citing the high cost of launching such a program and persistent budget deficits.

In 2020, Japan has been Asia's second-largest green bond issuer after China, but none of the issuance was backed by the government's budget. Some members in the debt management committee at the Ministry of Finance had in the past proposed considering issuing sovereign green bonds but it was not high on the agenda, according to the minutes of the committee's meetings.

"Our salespeople approached the finance ministry to discuss the green bond issuance but they [the ministry] seemed hesitant to do so because of such complicated procedure," an unnamed official at one of major Japanese securities companies said.

According to the guidance for sovereign green bond issuers by the International Finance Corporation, issuing sovereigns should create a green bond policy framework and a governance structure comprising senior decision makers, collate a long list of eligible expenditures and engage with external parties for review, verification, certification and post-issuance monitoring and reporting.

The sovereign green bond market is still small, compared to traditional government bonds and vanilla green bonds issued by non-sovereigns. According to Organisation for Economic Co-operation and Development, or OECD, data, as of July, 16 sovereigns have issued more than US$80 billion in green bonds cumulatively since the Polish government issued the world's first such debt in 2016. The total amount was only 0.1% of all government debt securities in the OECD area.

"There is no merit of issuing green bonds for the ministry as it would take time and money to prepare for the issuance," said Tamami Ota, a senior researcher at Daiwa Institute of Research Ltd. "In addition, the proceeds [of the green bond issuance] are limited [to green projects]."

Hidenori Suezawa, financial market analyst at SMBC Nikko Securities Inc., added that issuing sovereign green bonds "will increase cost ... as they [the government] will have to get the bonds rated and the green bonds will be less liquid." Any change of the government's stance "will be unlikely for a while," he added. Suezawa is a member of the debt management committee at the finance ministry.

Constraining deficits

"Obviously, the virus outbreak would give the government little leeway to spend on green projects as Japan's deficit has been swelling but it may have to spend more" to contain the spread of the pandemic and to revitalize the economy, said Mana Nakazora, chief ESG strategist at BNP Paribas in Japan. Nakazora is expecting the government to sit back over "the next two to three years."

The amount of Japan's traditional government bond issuance already hit a record high of ¥253.3 trillion in the fiscal year ending in March 2021 after the second supplementary budget was set, surging about 64% from the previous fiscal year, according to the Ministry of Finance.

That pushed up the country’s outstanding government bond issuance to ¥1,097.7 trillion in the fiscal year to date. Japan's deficit of about ¥989 trillion in the fiscal year through March 2020 is more than double its GDP, the world’s biggest.

Some analysts, however, do not rule out sovereign green bonds in the future, especially if Yoshihide Suga, who took office as prime minister in September, wants to show Japan's leadership in green investments in the region.

Japanese institutional investors seem to support the government’s environmental policy. If the government decides to issue green bonds, then "we’ll buy some of them,” said an unnamed official at one of the three Japanese megabanks.

Toyoki Sameshima, a senior analyst at SBI Securities Co., added: "Japan may follow Europe in the green bond issuance as it does in [environmental, social and governance]."

Whether the government will move to issue sovereign green bonds will be "a political decision,” said Yasunari Ueno, chief market economist at Mizuho Securities Co.

As of Dec. 11, US$1 was equivalent to ¥103.91.