July 16, 2021

By Leika Kihara and Tetsushi Kajimoto

TOKYO (Reuters) – The Bank of Japan (BOJ) said on Friday it will start buying green bonds using its foreign reserves as part of efforts to promote global investment in activities aimed at combating climate change.

Japan’s $1.4 trillion in foreign reserves are predominantly held by the Ministry of Finance, not the BOJ, so the decision is likely a symbolic move to raise awareness about the need to promote green finance. The BOJ holds about $70 billion of those foreign assets.

“The amount outstanding of green bonds in the global market is increasing, a trend that is likely to continue. Given this situation, the Bank will purchase foreign currency-denominated green bonds issued by governments and other foreign institutions,” it said.

The move comes as other major central banks use their institutional heft to take on climate change.

Last week, the European Central Bank said climate change would be a factor in policy relating to disclosure of financial information, risk assessment, collateral and corporate sector asset purchases.

In an outline of non-monetary policy steps to battle climate risks released on Friday, the BOJ also said it would encourage financial institutions to enhance disclosure on climate risks.

The BOJ, in collaboration with Japan’s banking regulator Financial Services Agency, is working on pilot exercises to conduct climate-risk scenario analysis on large financial institutions, according to the outline.

The central bank, through onsite examinations and offsite monitoring, will talk with financial institutions about their efforts to address climate risks and their engagement with borrowers to pursue carbon-neutral businesses, it said.

“The Bank will actively support financial institutions in identifying and managing their climate-related financial risks, with a view to maintaining the stability of the financial system and the smooth-functioning of financial intermediation,” the outline said.

The outline was released separately from the BOJ’s monetary policy decision on Friday, which included details of a new scheme to boost funding to activities aimed at combating climate change.

(Reporting by Leika Kihara and Tetsushi Kajimoto; Editing by Chang-Ran Kim and Sam Holmes)