Japan is selling climate bonds — last week saw the government auction off 800 billion yen ($5.33 billion, €4.95 billion) in 10-year bonds, with the next tranche planned for later this month. And that is only the beginning. The authorities hope to sell sovereign bonds worth 20 trillion yen in total to fund the country's green transition, which is often referred to in Japan as GX.

The Asian country is the first and so far the only country in the world to offer sovereign bonds for funding the reforms targeted toward tackling climate change. These government-issued debt securities are being sold to private investors. The investors are entitled to periodic interest payments and the full nominal value of the bond several years from now. 

In this way, the government can funnel private money into its climate goals without breaking its budget.

Some of the funds are set for projects such as low-cost wind power generators, carbon recycling technology and aircraft that utilize alternative fuels. A primary focus, however, will be the development of state-of-the-art batteries and microchips, designed to reduce emissions over the long term.

Ahead of the first sale, the chairman of the Japan Securities Dealers Association, Toshio Morita, emphasized that Japan lacks natural resources and is therefore vulnerable to energy shocks — but "exhibits technological strengths."

"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," he said.

Expectations too high?

The bonds are a key element of Prime Minister Fumio Kishida's plans to fund the transformation of Japanese industry and society. By the end of the decade, Japan hopes to cut its greenhouse gas emissions to less than half of what they were in 2013. By 2050, the country hopes to achieve zero emissions. An estimated 150 trillion yen in public and private GX-related investments are required over the next decade if Japan is to meet its declared targets.

The response to the climate bonds from the finance sector has been broadly positive.

Japan's Dai-Ichi Life Insurance Co came out strongly in support of the bonds on the day they were launched, confirming that it was investing to "encourage the transition of Japanese society to a decarbonized growth economic structure."

Others, however, were more cautious, with an official of Nikko Asset Management Co telling DW that the company would not comment on the climate bonds because it was "still a new instrument and our various experts are still analyzing it before they can answer any questions."

And this wariness is not limited to just one company. The demand for the bonds during the last week's sale was slightly below expectations, although the climate bonds were still doing better than the standard debt securities issued by the Japanese government.

"I would say expectations prior to the auction were too high," Keisuke Tsuruta, a fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities, told the Reuters news agency.

Critics want more clarity on standards

Japan has struggled to meet its fossil fuel pledges amid a flagging economy and contracting population. Its nuclear power sector was crippled by the 2011 Fukushima power plant disaster and has yet to recover, forcing the country to import over 90% of its energy needs. 

Martin Schulz, chief policy economist for Fujitsu's Global Market Intelligence Unit, told DW that the government's budget was already "overstretched."

"These bonds have been planned for a while and are designed to finance the development of renewable energies and infrastructure development but also keep that financing off the government's balance sheet," he said.

The scheme itself is not completely new, as the climate bonds have a lot in common with infrastructure construction bonds previously used by the government, according to Schulz.

He also says many wonder if listed green projects actually meet internationally approved standards.

"The tricky part is identifying exactly what these funds will be used for and whether they are all actually 'green' or 'renewable,' the definitions that are being used," he said. "At the moment, that looks a bit fluffy and that has led to criticisms of 'green-washing.'"

The fear is that some of the transition activities that have been approved as eligible for support, such as hybrid vehicles and the development of hydrogen fuel, are skewed more to supporting industry.

Japan's 'milestone' move as example to others

Yet the Climate Bonds Initiative (CBI), a London-based nonprofit that advises on policy and climate engagement, has praised the initiative, describing it in a statement as a "global exemplar of best practice."

The organization singled out Japan's commitment to earmark over 55% of the proceeds for research and development initiatives to limit the rising temperatures. This includes renewable energy but also technologies that use hydrogen to make steel, which nearly eliminates carbon emissions from the process.

"Corporates, cities and countries need to do transition plans in line with global emission reduction targets," said the CBI head Sean Kidney. "This bond shows clearly how governments, and others, can raise funds to invest in that transition. It marks a significant milestone in transition finance."

The next sale is scheduled to take place on February 27, with the release of another 800 billion yen in five-year bonds. An additional 1.4 trillion yen in transition bonds will be sold over the course of the next fiscal year, which starts on April 1.

Edited by: Darko Janjevic