Tokyo ranks relatively low in the league table of international financial centres, based on conventional criteria such as financial sector development and business environment. But what it can bring to the table by way of innovation in certain critical areas – as well as potentially investible domestic savings – should justify a greater role for the Japanese capital in future.
For example, Japan’s pioneering approach to transition finance in tackling climate change, coupled with the nation’s vast and largely dormant domestic savings that are available to support the spread of transition financing via the asset management industry, are underestimated resources.
Japan has 2,000 trillion yen (US$15 trillion) of household assets. According to Keiichi Aritomo, chief executive officer of FinCity.Tokyo, one-half of this is in cash or savings deposits that could be deployed into investment. These represent a lure for both domestic and overseas fund managers.
However, Aritomo, who was speaking at a FinCity.Tokyo investment roundtable on March 17, noted that numerous Japanese government ministries take a keen regulatory interest in how the nation’s savings, especially those of individuals are deployed. Fund managers will need to ensure that their aims align with Prime Minister Fumio Kishida’s “new capitalism”.
Under the rubric of sustainable growth and income redistribution, the new capitalism targets objectives ranging from wage growth to dealing with externalities such as climate change, where the emphasis will be on helping finance the potentially very costly transition from a brown to a green economy.
Kishida has suggested that Japan will need at least 150 trillion yen in private and public investment in the coming decade to become a carbon-neutral society. Part of this – some 30 trillion yen initially – will be raised from the issuance of government green transition bonds.
Industrial policy
Transition bonds are aimed at enabling high carbon dioxide-emitting sectors like electricity, gas, cement, iron and steel, oil, paper and aviation and shipping to achieve net zero targets. But they have failed to take off thus far outside of Japan, analyst Adrian Murdoch wrote in Capital Monitor.
He pointed out that two years ago, the Ministry of Economy, Trade and Industry established a framework for transition finance to help reach the government’s carbon-reduction targets. The framework made transition a part of Japan’s industrial, rather than just sustainability, policy, which has helped clarify their purpose among both issuers and investors.
According to FinCity.Tokyo data, 16 Japanese companies issued 31 of these bonds from 2021 up to March 2023. All are denominated in yen, and valued at a nominal 456 billion yen.
As of end-September 2022 only $3.4 billion of transition bonds had been issued globally, making up just 0.4% of sustainable bond issuance, according to the London-based Climate Bonds Initiative.
This is one example of financial innovation that has wider applicability, and suggests that Japan’s role in helping other financial centres to innovate in the area of climate change finance could become greater. Combined with vast financial resources it, also points to a greater international role for Tokyo as a financial centre.
“Tokyo is at the heart of Japan’s industrial base and its extensive supply chains in Asia. As a hub for transition finance, it can play an important role in the decarbonisation of heavy industry in the region,” Aritomo told Asia Asset Management.
