Photo/Illutration Haruhiko Kuroda, governor of the Bank of Japan, speaks at a news conference on July 16. (Pool via The Asahi Shimbun)

The Bank of Japan plans to use monetary policy to help combat climate change.

While there is an urgent need for fighting global warming, it should be assessed carefully whether a central bank should embark on such a policy and to what extent effects and side reactions are expected from it.

The BOJ should put the new measure into practice on a trial basis for the time being and give extensive thoughts to the issue.

The BOJ approved a “preliminary outline” of the planned policy during a monetary policy meeting earlier this month. The central bank plans to provide funds at a zero interest rate for investments and loans by private financial institutions that are deemed as “efforts to address climate change.”

The funding will be available on condition of a certain level of information disclosure.

According to BOJ officials, eligible investments and loans will include not only those for “green” business programs, such as renewable energy projects, but also those for helping companies that produce a large amount of carbon dioxide reduce their emissions, among other examples.

Either in institutional designs or policy measures, nonconventional approaches are required to accelerate a move toward a carbon-free society and economy. We have no objection to the BOJ, aware of that challenge, seeking what role it can play.

The BOJ holds a powerful authority for issuing currency and is also granted a certain level of independence from the government.

However, the BOJ enjoys such power as long as that serves the central bank’s aim, as stated in the BOJ Law, of “achieving price stability, thereby contributing to the sound development of the national economy.”

The BOJ said, “Climate change issues could exert an extremely large impact on developments in economic activity and prices as well as financial conditions from a medium- to long-term perspective.”

It also argued that supporting efforts on those issues “will contribute to stabilizing the macroeconomy in the long run.”

That must certainly be true as far as generalities go. Similar arguments have been made internationally, and central banks in Europe are taking a positive stance toward climate change initiatives.

That said, available insight is still limited on the extent of the impact of climate change and the degrees to which monetary policy can be used to control it.

BOJ officials should think carefully if it would be possible to design a desirable policy measure and modify it as the need arises on the basis of the reviews of its consequences.

The BOJ has been providing the market with large amounts of funds to achieve its stated goal of a 2-percent inflation rate. Its new policy step may not create a big problem if it is limited to making that operation “greener.”

However, there is no guarantee that BOJ financing of climate change countermeasures will remain consistent well into the future with the central bank’s principal mandate of stabilizing prices and the financial system.

While BOJ Governor Haruhiko Kuroda indicated he believes that priority should be given to the central bank’s traditional mandate, this overall question needs to be defined more clearly.

The wisdom of a central bank backing specific types of investments and loans can also be problematic from the viewpoint of neutrality.

The BOJ, well aware of the issue, has emphasized that it will only support independent decisions made by private financial institutions.

As long as financing is provided, however, a certain line will have to be drawn somewhere.

In light of these considerations, the BOJ’s planned mission should primarily have been left to the government’s fiscal policy or policy-based financing programs, both of which have to undergo deliberations in the Diet.

There should be in-depth and down-to-earth discussions on the extent to which a central bank should be involved.

--The Asahi Shimbun, July 24