Japan's Green Transformation Policy: are investors overlooking an opportunity?

Japan has launched a $140 billion Green Transformation Policy. Although widely accepted as a hugely significant programme, we believe that it  hasn’t received sufficient attention from investors. The policy initiative could create tailwinds for a wide range of Japanese securities. It could also help promote the concept of ‘transition finance’, which provides financial support to help with decarbonisation of high-emitting activities.  

Clean energy and growth

Japan announced its Green Transformation (GX) Policy in February 2023. The policy aims to transform Japan into a clean-energy economy while ensuring energy security and achieving economic growth. This is Japan’s main strategy to achieve its decarbonisation targets and reach net-zero by 2050.

The strategy is motivated by two factors. Firstly, Japan relies heavily on energy imports. The conflict in Ukraine and resulting energy inflation have highlighted the need to reduce Japan’s dependence. 

Secondly, governments are increasing their support towards clean technologies, as these can make businesses more competitive and boost economic growth. The US Inflation Reduction Act (IRA) is the most notable example, providing subsidies that have significantly increased clean investment. 

What are the investment risks and opportunities? 

The GX policy includes a wide range of measures. The main measure is the issuance from the Japanese government of ¥20 trillion (approximately $140 billion) of GX economy transition bonds over 10 years [1].

This aims to mobilise ¥150 trillion of public-private investment. It will be complemented by a carbon-pricing mechanism to help finance the bonds, including a GX Emission Trading Scheme set to begin in 2026 and a carbon levy on fossil fuel imports from 2028. While the details of the carbon-pricing mechanism are still being finalised, the government has already issued ¥3 trillion in transition bonds [2].

There is also an emphasis on ‘transition’ finance, focused on the new technologies needed to decarbonise emission-intensive industries [3]. Transition finance differs from ‘green’ finance, which funds activities that are already sustainable. 

For instance, nearly 30% of Japan’s CO2 emissions come from material manufacturing industries. Innovative technologies are needed to help reduce the sector’s emissions. 

The Government set up guidelines on climate transition finance and developed sectoral technology roadmaps to help companies label their decarbonisation investments as transition instruments and to raise funds for them. Importantly, companies are expected to show a credible transition strategy incorporating governance disclosure and transparency in the investment plan. 

Why should investors care and what sectors could be affected?

The Japanese government plans to allocate approximately ¥14 trillion across 16 industries [4]. It will focus on sectors such as steel and chemicals. The plan will support electric arc furnaces (EAF); biochemicals; carbon capture, utilisation and storage (CCUS); buildings (home upgrades and renovations); and innovative energy sources like hydrogen and next-generation renewables (that is, perovskite solar cells and floating offshore wind).

It also details the specific projects that are allocated to bond issuances. The inaugural GX Economy Transition Bond issued in February 2024 put a significant emphasis on innovation. Around 55% of the funds were allocated to research and development (R&D), primarily via the Green Innovation Fund (a fund set up by Japan's New Energy and Industrial Technology Development Organisation (NEDO) to support R&D projects). This includes 18% for hydrogen use in steelmaking and decarbonisation of the thermal process [5].

Below, we’ve given five examples of sectors that could benefit from the GX programme (this is a non-exhaustive list) [4]:
 

Our take? 

The recently launched GX programme could position Japan as a leader in climate technology and provide support for a broad range of securities. Tracking the proceeds from upcoming bonds could offer insight into which industries will benefit.  

GX economy transition bonds could increase awareness of transition finance, aimed at supporting high-emitting industries and incentivising innovation. However, it's uncertain if transition bonds will become popular outside of Japan; few non-Japanese players have entered the transition bond market.

For investors, a greater emphasis on transition finance means a tilt towards high-emitting industries that are essential to drive real-world emissions reductions. Given this tilt, it becomes more important that when evaluating transition strategies, investors identify whether companies have ambitious and credible decarbonisation plans.

National policies matter when assessing and engaging with companies  

Our active ownership team engages with multiple Japanese companies on behalf of our clients. Japan’s GX Policy is brought into discussions to assess how it would influence transition plans and investment towards climate solutions. Taking the example of the auto industry, it’s the sector that will receive the most support from public and private investment (¥34 trillion) [4]. The latest bond issuances allocate subsidies to promote clean-energy vehicles. Similarly, multiple automakers are involved in the development of next-generation storage batteries, as part of the Green Innovation Fund. These innovative technologies could accelerate the transition of the transport sector. This example illustrates why climate policies should be incorporated when analysing and engaging with companies.  

Final thoughts…

Similar to the US IRA policy, Japan’s GX policy provides massive support for companies to help transition their business models. While the country isn’t considered a climate leader, the scale of the package could make Japan an area of interest for investors. As the US IRA may receive some cuts, what is happening in other regions, including Japan, could attract more attention from investors. 

The GX programme also has unique features, with an emphasis on transition finance and innovative solutions. This could accelerate the focus on real-world impact and identify companies with robust transition plans. Lastly, it underscores that climate policies which strongly influence companies’ actions should be included in corporate engagements.