Over the next decade, the Japanese government plans to issue a total of ¥20 trillion (US$133 billion) in transition bonds known as “GX bonds.” The proceeds raised from their issuance will be used to support the development of technologies such as hydrogen supply networks, carbon capture and utilization, synthetic fuels and small nuclear reactors.
“Energy is the largest issue, in my view. The situation is difficult because Japan is very reliant on imports of fossil fuels,” says Akane Enatsu, Head of Nomura Research Center of Sustainability.
Green bonds issued by Japanese local governments, which have implicit government guarantees, may serve as guides in terms of pricing. In recent months, such green bonds have enjoyed a small premium of 1 to 2 basis points (0.01% to 0.02%) over regular bonds with a comparable duration.
However, the market for transition bonds in Japan is currently modest in size. According to the Japan Securities Dealers Association, non-sovereign issuers sold ¥236 billion of transition bonds in 2023, compared with ¥421.2 billion a year earlier. In mid-February, Japan auctioned sovereign climate transition bonds for the first time, but demand was not as strong as predicted. In total, it sold ¥800 billion (US$5.3 billion) in 10-year transition bonds.
It is possible that international investor interest was lower than expected because of concern that the GX bonds are not sufficiently green. For instance, the GX bonds could be seen as supporting traditional industrial policy in that they will fund R&D efforts in some industries like steel. Yet that might still help to mitigate climate change if it supports new technologies that reduce greenhouse gases and the broader carbon footprint. Further, the use of proceeds does specifically exclude both gas-fired power plants and hybrid coal/ammonia generating stations.
On a more positive note, global green bonds sales in the first half of the year reached a record US$356 billion per Bloomberg data. Sustainable bond issuance as a whole set new records in the first quarter, boosted by government bond issues as well as transition bonds in Japan. The Japanese government debuted its green transition bond, with three separate transactions occurring in the first six months and totaling more than US$12 billion.