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Empty Mind after Ten Thousand Reasons

Green quantitative easing policy

Kazumasa IWATA


In April 2020, the Bank of France published a paper that posed a questions: “COVID-19 first, and climate change later?”; its answer was as following; “It’s not that simple. Health and the environment are connected.”

New epidemics, such as the new coronavirus infection, occur as human economic activity expands and contact with wildlife increases. Similarly, global warming proceeds as human economic activity expands with ecosystems on the earth becoming dysfunctional. The World Wide Fund for Nature (WWF) has issued a joint declaration of “One Health” that human and animal health is linked to biodiversity and ecosystem functions. There are 820,000 unknown viruses that can infect humans. The link between health and the environment is symbolized by the risk that global warming will thaw the permafrost in Siberia and some of it will resume activity.

The Bank for International Settlements (BIS) published its “Green Swan” report on climate change risks in January 2020, arguing that stranded assets will amount to $18 trillion (approximately 1.9 quadrillion yen). In May, it published a new report, “Green Swan 2”, identifying diseases arising from the COVID-19 as Green Swan risks.

Bank of France Governor Villeroy de Galhau argued that the European Central Bank’s purchased assets and collateral assets of 2.4 trillion euros (approximately 310 trillion yen) should be “decarbonized.” In the UK, Chancellor of the Exchequer Sunak has announced that a carbon-free society is added to the mission of the Bank of England, and has decided to issue green government bonds that have limited use for the environment improvements.

Climate change risks include “physical risk”, where natural disasters occur frequently, and “transition risk”, which occurs during the transition period to a carbon-free society. The Bank of the Netherlands (Central Bank) conducted a stress test to estimate the financial risk during the transition period due to technological innovation and changes in institutions and regulations using the macro-economic model, and estimated that it would push down the capital adequacy ratio of banks by more than 4%.

Of note is the magnitude of the economic loss caused by the corona crisis. Former US Treasury Secretary Summers and his colleague estimated that the loss in the US would reach $16 trillion (approximately 90% of the US GDP), considering the decline in Gross Domestic Product (GDP) and the loss of human capital such as the dead and the sick. The loss of Green Swan coupled with the new threat is immeasurably large.

According to estimates by the Japan Center for Economic Research, bank lending to industries with carbon dioxide (CO2) emissions per added value higher than the average for Japan as a whole will reach 100 trillion yen. In addition, the amount of loss of domestic banks caused by corporate bankruptcy due to the corona crisis will reach the level ranging from 11 trillion yen to 40 trillion yen.

Japan needs to hurry to green its quantitative easing policy. The private-sector assets purchased by the Bank of Japan amount to 44.4 trillion yen (at the end of the first half of 2020), including commercial paper (CP) and exchange-traded funds (ETFs). These assets should be decarbonized. “The Novel Coronavirus special operation” should be transformed into the “Green and Digitization Promotion Operation”; its size will be expanded more than the limit of 120 trillion yen. If the funds obtained by the financial institution are deposited in the BOJ’s current account, a 0.1% interest will be attached. If the government issues green government bonds, it should be considered as a priority purchase. Exit from the corona crisis is also a fight against climate change.

(The english translation of the article was published in the Nikkei morning edition 2021/3/19.)