BOJ to highlight climate risks as key theme of bank tests this year: sources

TOKYO (Reuters) – The Bank of Japan will for the first time highlight climate change risks as among key themes in its bank examinations this year, sources said, joining major peers moving to gain research clout on the effects of global warming.

In guidelines on the examinations due next month, the BOJ will clarify its readiness to coordinate with Japan’s banking regulator in analysing the impact of climate risks on financial institutions, said three sources familiar with the matter.

The central bank will also beef up cooperation with the regulator, the Financial Services Agency (FSA), in studying European examples and specific ways to measure financial risks associated with climate change, they said.

The moves are part of Japan’s efforts to follow in the footsteps of an increasing number of countries working on or considering stress-testing financial institutions on climate risks.

“For the BOJ, green QE is still off the radar. The more approachable and near-term focus is to assess climate change risks on the financial system,” one of the sources said, a view echoed by two other sources.

“Climate change is a key theme for the BOJ this year,” another source said, adding that stress-testing climate risks on financial institutions is “not imminent, but something Japan needs to aim for in the future.”

The BOJ conducts hearing and on-site monitoring in voluntary examinations on financial institutions. But it does not have regulatory authority, which falls under the FSA. Neither the BOJ nor the FSA stress-tests banks on climate risks.

Officials of the two institutions have been discussing climate change as among topics that could affect Japan’s banking system. But progress toward stress-testing financial institutions has been slow because of a lack of data and models.

The BOJ began to gear up efforts on climate change after Prime Minister Yoshihide Suga last year pledged to make “green” investment a key pillar of his growth strategy.

The Biden administration’s focus on battling climate change, and the Federal Reserve’s decision in December to join an international central banks’ group focused on climate risks, also prodded the BOJ to engage more, the sources said.

But actual roll-out of stress tests will take at least another year as policymakers work out guidelines and details, including whether they will ask banks to conduct a “self-assessment,” the sources said.

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