Sustainable Bond: Japan's ¥800bn 10-year climate transition bond
Transition pioneer The climate transition bond that Japan launched in February – and the bonds that followed – significantly expanded the sovereign ESG financing menu, particularly where hard-to-abate industries account for a substantial share of an economy.
Five of Japan’s fellow G7 members had already offered conventional green bonds. But it took a different route.
Its CTB programme, which a late January auction was set to carry to ¥3trn (US$19bn) and will total ¥20trn over a decade, marks the first labelled transition debt from any sovereign issuer.
Japan intends the bonds to spark as much as ¥150trn of investment to support its efforts to reach net zero by 2050 while growing the economy.
CTBs “[show] how to create an economic transition programme and fund the government commitments to drive it", said Sean Kidney, chief executive of the Climate Bonds Initiative, which certified the inaugural deal as meeting its rigorous green bond standard.
The NGO described CTBs in a briefing note as a “groundbreaking milestone in sustainable finance”.
Maintaining its standard auction approach to government bond distribution, Japan completed five CTB offerings during 2024 and has scheduled a sixth for early 2025.
While CTBs lack bookrunners’ sponsorship, the sovereign appointed 12 domestic and international banks as CTB “promoters”.
Although largely sold to domestic institutions, with the Bank of Japan holding over 40% of February’s inaugural issue soon after launch under its huge bond buying mandate, the deals also attracted appetite in Europe and the US, according to bankers.
Japan marketed CTBs to 40 international investors ahead of launch.
An ¥800bn 0.7% 10-year opened the series. This emerged at a modest greenium of 0.5bp that expanded to 3bp within two days before narrowing again.
A 0.3% five-year of the same size launched later in February with a 1.5bp greenium witnessed the same volatility in this measure.
The most recent offering, in October, marked the first CTB tap. It doubled May’s ¥350bn 1% 10-year, the series’ second 2034 bond.
At the end of January Japan will tap the ¥350bn 0.5% five-year it introduced in July as a second 2029 CTB.
The programme’s second year could see Japan expand the instrument’s yield curve. The sovereign has said that CTBs may also carry two and/or 20-year maturities.
The sovereign has reported notable interest in the product from peers and expects others, particularly in Asia, to follow its lead soon.
Some 55% of the inaugural proceeds went to research and development of industrial and energy transition technologies, notably the use of hydrogen in steelmaking. The remainder went to decarbonisation subsidies – mainly for semiconductors, battery storage and buildings’ energy efficiency.
The Climate Bonds Initiative classified 40% of these activities as green and noted the deal did not fund gas-fired power generation, nor did it finance internationally controversial technologies like ammonia co-firing for coal, which Japan supports.
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