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Bank of Japan flags new step on climate and extends COVID-19 support program

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The Bank of Japan surprised investors by joining other central banks with a measure to support climate change mitigation, while standing pat on its main policy levers.

In its decision Friday, the BOJ also pushed back the expiration of its pandemic lending measures by six months, giving Japan’s vaccine drive more time to work. That move was expected by most economists and seen as a tweak around the margins of a policy tool kit that’s largely tapped out.

The new initiative providing funds for bank lending to climate-friendly businesses comes after Gov. Haruhiko Kuroda last month hinted in an interview that the central bank might be looking at ways to support the battle against global warming.

The move also follows a Bank of England announcement last month that it will shift corporate bond purchases toward firms doing the most to fight climate change under a new remit that includes environmental sustainability.

European Central Bank President Christine Lagarde has also voiced support for the European Union’s efforts to transition to a greener economy.

“The BOJ is showing its will to deal with the climate change problem,” said economist Takeshi Minami at Norinchukin Research Institute. “They are following the global trend as private companies start taking action, but this is different from monetary easing.”

Friday’s decision moves the BOJ closer to some of its peers on climate, even as it drifts in a different direction on monetary policy.

While the U.S. Federal Reserve, the Reserve Bank of Australia and other central banks inch closer to reining in stimulus, the BOJ stood pat on its negative interest rate and plans for asset purchases.

Kuroda and his colleagues are likely to maintain that cautious stance for the foreseeable future given stubbornly sluggish inflation in Japan that contrasts with price gains seen elsewhere as the world reopens from the pandemic.

A separate report Friday showed Japanese price growth just edging into positive territory in May, even with a surge in gasoline prices.

“I hope they won’t use this climate effort to try to deflect attention from their failing progress on inflation,” said economist Kyohei Morita at Credit Agricole Securities Asia BV. “This won’t bring them any closer to their distant price target and they are probably aware of that.”

“The Bank of Japan isn’t taking any chances — the earlier-than-expected extension of its COVID-related support program shows a determination to keep a prop under the economy,” said Yuki Masujima, economist at Bloomberg Economics. “A new climate-related funding program also shows it’s looking to manage longer-term risks that will affect its post-COVID approach to policy.”

The BOJ said it would start operating the new climate change facility within the year and will offer details at next month’s meeting.

“The bank considers that supporting the private sector’s efforts on the issues from a central bank’s standpoint will contribute to stabilizing the macroeconomy in the long run,” it said in a statement.

While the BOJ’s new program could help Japan move a little closer to ambitious goals set by Prime Minister Yoshihide Suga for making the country carbon-neutral by mid-century, it could also invite criticism from some global central bankers who feel the environment should be left to government policy.

“Everyone expected that the BOJ would do something on climate at some point, but unveiling it in June is earlier than expected,” said economist Yoshimasa Maruyama at SMBC Nikko Securities. “They’ve clarified that their stance on climate change is a little closer to the ECB than the Fed.”

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