Opportunities From Japan's New GX Bond

Todd Moses
June 29, 2024

On July 2, 2024, Japan will launch its inaugural JPY1.6 trillion (USD 11 billion) Climate Transition Bond, dedicated to funding the nation's extensive Green Transformation (GX) program.

Inputs that matter: The GX Plan aims to mobilize JPY150 trillion (USD 1 trillion) in public and private investments over the next decade, targeting cutting-edge, sustainable technologies to mitigate domestic emissions.

  • Since the Great East Japan Earthquake of 2011, Japan has relied heavily on imported oil, coal, and liquefied natural gas.
  • Japan's GX promotion strategy establishes two key initiatives to meet international commitments, ensure a stable energy supply, and realize economic growth.
  • One is a Stable Energy Supply and Decarbonization to promote energy conservation measures.
  • Two, a Growth-Oriented Carbon Pricing Concept to implement upfront investment support.

The opportunity: Data from the Green Digital Finance Alliance shows that the global issuance of bonds for green, social, sustainability, and sustainability-linked purposes reached $4.2 trillion in 2023.

  • This must be compared to the Climate Policy Initiative's estimate of $10 trillion per year needed between 2031 and 2050.
  • The Bank of Japan has also taken measures to address climate change, with a green loans scheme that provides zero-interest financing to lenders to support the transition to a greener economy.

Zoom in: A substantial 55.5% of the bond's proceeds will fund R&D initiatives. It would focus on renewable energy and hydrogen utilization in steelmaking to help limit global temperature increases to 1.5°C.

  • The remaining 44.5% will support subsidies for manufacturing electricity storage batteries and implementing energy-efficiency measures in buildings.
  • The bond excludes funding for gas-fired power generation or ammonia co-firing in coal-fired plants.

Between the lines: Transition bonds can be either sustainability-linked or use-of-proceeds bonds explicitly issued to support climate transition goals.

  • The Japan Credit Rating Agency has verified that the bond's use of proceeds is 95 percent aligned with the standards of the Climate Bonds Initiative, a non-profit organization.
  • According to the CBI, the bond excludes any allocation of proceeds towards "gas-fired power generation or operational activities involving ammonia co-firing in coal-fired plants."
  • "The bond is a prime example of private-public partnership at scale," says Jarek Olszowka, head of sustainable finance at Nomura.

Follow the money: Japan's climate transition bonds set a new standard for sovereign transition bonds.

  • While the projects initially aim at domestic investors, Japan hopes to open investments to international markets.
  • This model can guide other nations, especially in emerging markets.
  • Consequently, leveraging future carbon pricing revenues and attracting significant investment for green transformations.

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Read More

  1. https://carboncredits.com/japans-usd11-billion-climate-transition-bonds/
  2. https://www.thebanker.com/World-s-first-sovereign-climate-transition-bond-a-significant-milestone-1708680075
  3. https://greencentralbanking.com/2023/11/24/japan-green-transition-bond-carbon-capture/
  4. https://www.asiaasset.com/post/28166-analysis-27-feb-0227