FACTBOX-The Bank of Japan’s new scheme and approach on climate change

TOKYO, June 18 (Reuters) – The Bank of Japan surprised markets on Friday by unveiling a plan to boost funding for fighting climate change, joining a growing number of central banks stepping up efforts to address its economic and financial fallout.

Below are details on what the scheme could look like and what other steps the BOJ might take to address climate change:

HOW WILL IT WORK?

The BOJ will lay out details next month, but says the scheme will be similar to a decade-old loan programme offering loans at zero interest to financial institutions that boost lending to areas considered growth industries.

Depending on upcoming discussions, the BOJ may decide to offer incentives such as paying financial institutions 0.1% interest for tapping the scheme to encourage them to boost green loans and investment.

The BOJ aims to roll out the first batch of loans around year-end.

HOW WOULD IT DIFFER FROM EFFORTS OF OTHER CENTRAL BANKS?

The BOJ remains cautious about buying green bonds, or taking any steps that require it to choose between “green” and “brown” loans for fear of stepping into the realm of government policy.

That stance was made clear in the BOJ’s statement announcing the plan that said it was “important to give consideration to market neutrality” in taking monetary policy steps on climate change.

The BOJ will thus leave the decision on whether loans are green or brown to private financial institutions, and indirectly assist green investment by encouraging lenders to boost loans to activities aimed at fighting climate change.

The approach may be a smoother way to aid green innovation in Japan, where many companies rely more on bank loans than tapping financial markets for funds.

WHY NOW?

The BOJ says the idea has been in the works for some time, and responds to growing awareness among global central banks to step up efforts to tackle climate change.

But the announcement may also be a token gesture to Prime Minister Yoshihide Suga that the BOJ is working hand in hand with the government, which laid out this month a growth strategy flagging green investment as a policy priority.

It also meshes with Suga’s pledge to the global community to make Japan carbon neutral in 2050.

WHAT ARE THE STICKING POINTS?

While the BOJ will leave financial institutions to choose which loans are green, it still needs to set some criteria to vet applications for funds by the lenders.

That will be no easy task, particularly as Japan lags behind Europe in efforts to classify which investments are truly green.

The long time horizon of climate change, spanning several decades, could also force the BOJ to maintain the scheme for longer than it wants and make any exit difficult.

WHAT ELSE IS ON THE TABLE?

Aside from the new scheme, the BOJ will unveil later this year a list of non-monetary policy steps it will take on climate change, such as research and analyses on the financial risks associated with climate change.

The BOJ will focus on research and exchanges with overseas counterparts, while regulation and rule-setting will be left to Japan’s banking regulator Financial Services Agency (FSA).