Japan’s Transition Finance – A Roadmap For UK-Japan Collaboration On Net Zero
Returning to London this week, I was struck not just by nostalgia but by the current heatwave – a powerful reminder that climate change can no longer be dismissed. From Tokyo to London, the growing frequency of record-breaking summers has become a shared reality, fuelling the urgent need for global action.
The UK and Japan may be thousands of miles apart, but both economies share the complex challenge of decarbonising mature, diversified industrial bases. Japan’s business community increasingly recognises not all industries can go green overnight; many sectors require an “amber” phase— where it makes sense to move in incremental steps to steadily reduce emissions whilst working towards decarbonisation. Instead of weakening ambition for carbon neutrality by 2050, this approach ensures material progress across all industries and avoids leaving legacy sectors behind.
But ambition alone is not enough. Transforming the global economy will require trillions of dollars a year. This is because every single sector, including those hard-to-abate industries like steel, cement, heavy transport and chemicals, will need to adjust their business models. In Japan, the government estimates it will need a staggering ¥150 trillion of public and private investment over the next decade. Of this, ¥20 trillion will come from Japan’s world-first sovereign climate transition bonds—a new asset class intended to raise capital for carbon-intensive industries to start greening their operations in the shift towards a low-carbon future.
Raising and deploying more transition finance at scale, particularly into high-emitting sectors, into earlier-stage technologies, and into helping developing economies, was a key theme of the conference I attended this week in London. I was encouraged to see that the transition approach is also gaining momentum in the UK, symbolically represented by the publication of the Transition Finance Market Review by City of London and the launch of the Transition Finance Council, chaired by the Rt Hon Alok Sharma.
Indeed, the vision of a “decarbonised society” constitutes an important pillar of Japan’s growth strategy. It promises not merely environmental benefit but economic wins, jobs being created, new industries being built from the ground up, the capacity to reignite long-term growth after years of stagnant productivity.
The concept of transition finance in Japan is materialising rapidly. Under new guidelines developed for ten high-emitting industries, 23 companies have now issued 79 domestic transition bonds, raising $8.4 billion. These sector-focused roadmaps are geared toward helping companies to detail precisely which low decarbonisation investments are eligible for funding. The good news is that we know the transition is possible: the costs of issuing these transition bonds have generally been lower than non-ESG corporate straight bonds, suggesting investors are recognising their unique value and that the government’s climate transition bond has played a catalytic role in mobilising private capital.
We’ve also introduced other tools. Blended finance with risk mitigation elements, as well as carbon credits that provide economic incentives for decarbonisation and generate cash flow, are crucial.
Yet some challenges remain. For transition bonds to be successful, we need to harmonise the diverse taxonomies and regulatory approaches emerging across Asia and beyond. Similar but different efforts are underway elsewhere in the region, so an important task is securing compatibility, credibility, and consistency in transition finance across the Asia-Pacific.
To forge closer collaboration, proactive steps have been taken through the launch of the Asia Transition (GX) Consortium, a platform that facilitates direct engagement with ASEAN partners to scale up transition financing projects. In the same way there is immense scope for collaboration with the UK ranging from policy development to market building. One promising area is the expansion of voluntary carbon markets. The APEC Business Advisory Council (ABAC) Pathfinder project is leading a private-sector initiative to develop a network for high-quality carbon credit trading, underpinned by blockchain, enabling emissions reductions to be monetised and traded. This currently links Japan, Hong Kong and Singapore, as well as markets in Australia and New Zealand, Brunei, Canada, Indonesia and Thailand. British expertise in green finance and market regulation would be invaluable partners as the network expands geographically.
The tangible outcome of Japan’s transition financing efforts is an evolution of new types of financial instructions, including AAA-rated green bonds indexed to the World Parity Unit. By reducing and even eliminating the currency exchange risk for both issuers and investors, this type of bond could greatly improve transitional financing. If all runs smoothly, we expect to see a landmark issue from a major multilateral lender. This kind of financial ingenuity is precisely what the international community should focus on at COP30 and beyond.
Japan’s transition finance model is still a work in progress but serves as a laboratory from which valuable lessons can be drawn. As two of the world’s most advanced economies, the UK and Japan should seize this moment to collaborate on credible, scalable solutions that deliver both climate and economic dividends.
Hiroshi Nakaso, Chairman, FinCity.Tokyo and Former Deputy Governor, Bank of Japan
