Over the next decade, the Japanese government plans to issue 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. According to Nikkei Asia, total issuance is expected to surpass the ¥15 trillion primary market for corporate bonds and equities in Japan.
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. Data from the Japan Securities Dealers Association show that non-sovereign issuers sold ¥236 billion of transition bonds in 2023, compared with ¥421.2 billion a year earlier.
Prior to the first sale of GX bonds, chairman of the Japan Securities Dealers Association Toshio Morita noted that the green transformation, “which aims to shift the foundations of society and industry from one centered around fossil fuels to one based on clean energy, is a core initiative to transform industrial and energy policies and strengthen corporate and national competitiveness.”
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.
We believe that international investor interest may have been a bit soft 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. However, one could argue that this is still beneficial for mitigating 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.