BOJ urged to abandon ‘market neutral’ approach towards climate risks

13 July 2026 - A new briefing from UK-based think tank Positive Money has laid out a four-step plan for the Bank of Japan (BOJ) to “green” its policies, in order to shift financial flows away from environmentally-damaging activities which threaten economic stability, and redirect more finance towards critical green projects, such as renewable energy infrastructure.

This briefing follows a report from the organisation published last year, which found that Japan’s central bank and financial regulator - the BOJ and the Financial Services Agency (FSA) - significantly underperformed against their counterparts in the ASEAN+3 when it came to how well they are integrating environmental considerations into their work. Japan ranked sixth out of the 13 countries assessed, despite having some of the strongest economic and institutional capacities in the region.

Positive Money’s latest research acknowledged encouraging steps in the right direction currently being undertaken by the BOJ, such as the expansion of its Climate Response Financing Operations (CRFO), but finds that the BOJ’s overall stance of wanting to remain ‘market neutral’ and its preference for private-sector leadership are “self-imposed constraints” on the Bank, which risk slow and fragmented growth in green finance.

The briefing argues that ‘market neutrality’ actually favours already dominant sectors - many of them high-carbon - and is therefore not neutral at all. Positive Money says that because environmental measures are required as part of financial stability risk management, the BOJ can actually integrate them into its existing operational framework. They also highlight that by letting the financial firms accessing their climate refinancing facility (the CRFO) decide what counts as climate action, the BOJ is enabling low standards and undermining its effectiveness.

To address these shortcomings in the BOJ’s current approach, and to improve its score in the next East and Southeast Asia Green Central Banking Scorecard, the briefing recommends that the central bank:

1. Revise the Climate Response Financing Operations, so they have stronger conditions and stop enabling greenwashing by allowing financial firms to decide what counts as green investment

2. Establish a green collateral framework (i.e. don’t accept dirty assets connected to fossil fuel expansion as collateral against loans to financial firms)

3. Set climate-resilient stewardship and portfolio strategies, so that the BOJs holdings don’t embed existing market biases towards high-carbon sectors

4. Shift to a ‘double materiality’ approach, meaning that the role of the financial system in shaping climate risks is recognised, rather than the current approach of only looking at the risks climate change poses to the financial system

Joe Herbert, Senior Researcher at Positive Money, said:

“The Bank of Japan’s faith in markets to lead the green transition has caused an overdependence on voluntary initiatives, which won’t meet the speed or scale of action needed to effectively address the climate and nature crises.

“The BOJ must move away from its ‘market neutral’ approach, which in reality implicitly favours environmentally-destructive sectors, and move towards a ‘double materiality’ approach, which properly factors in the financial sector’s contribution to environmental breakdown, and seeks to curb it. 

“This would not only be within the BOJ’s mandate of maintaining price and financial stability, but would be in line with the international standards being set by global bodies such as the Network for Greening the Financial System and the Basel Committee on Banking Supervision.”

Notes:

• The briefing can be read in English here: https://www.datocms-assets.com/132494/1778508226-from-market-neutrality-to-risk-discipline-a-green-central-banking-agenda-for-the-bank-of-japan-docx.pdf 

• The briefing can be read in Japanese here: https://www.datocms-assets.com/132494/1783607336-jp.pdf

• The briefing is authored on behalf of Positive Money by Matthew Poggi, affiliate of the Council on Economic Policies; Visiting Senior Fellow at the Centre for Economic Transition Expertise, London School of Economics; and, part-time lecturer at Yokohama City University. 

• Positive Money’s 2025 East and Southeast Asia Green Central Banking Scorecard, in which Japan ranked 6th place out of 13 countries, can be found here: https://positivemoney.org/uk-global/publications/east-southeast-asia-green-central-banking-scorecard/