BOJ's Balancing Act: Maintaining Inflation Target Amidst Climate Risks

The Bank of Japan (BOJ) faces a delicate challenge in maintaining its 2% inflation target while monitoring and managing climate shock risks. As climate change impacts become more pronounced, central banks worldwide must adapt their policies to address these emerging threats. This article explores the BOJ's strategies to balance its inflation target with the need to mitigate climate-related risks.

The BOJ's commitment to its 2% inflation target is unwavering, even in the face of long-term climate change impacts. Governor Kazuo Ueda recently stated, "We would like to keep the inflation target at the current level, even if climate change shocks occur." However, the BOJ is acutely aware of the potential disruptions that climate change could bring to economic activity and financial stability.
Physical risks, such as extreme weather events, and transition risks, like the shift to a low-carbon economy, can significantly impact inflation dynamics. The BOJ's strategy involves closely monitoring these risks and supporting financial institutions in managing them effectively.

To mitigate climate-related risks, the BOJ has introduced a new fund-provisioning measure. This measure, launched in 2021, provides funds to financial institutions against their investments or loans made as part of climate change initiatives. By incentivizing financial institutions to disclose information on their climate change efforts, the BOJ aims to foster a greener financial system while maintaining the stability of the financial system and promoting decarbonization.
The BOJ's commitment to addressing climate change extends beyond its monetary policy. It actively supports financial institutions in identifying and managing their climate-related financial risks, encouraging enhanced disclosures based on the Task Force on Climate-related Financial Disclosures (TCFD) framework. By fostering a more resilient financial system, the BOJ can better withstand the shocks associated with climate change.
International cooperation and shared experiences significantly influence the BOJ's climate change strategies. The BOJ actively participates in international forums like the G7, G20, and EMEAP, learning from other jurisdictions' experiences and contributing to global discussions on climate change mitigation. By collaborating with other central banks, the BOJ can enhance its climate change strategies, fostering a more resilient and sustainable global economy.
In conclusion, the BOJ's commitment to maintaining its 2% inflation target while monitoring and managing climate shock risks is a testament to its adaptability and forward-thinking approach. By implementing targeted measures, such as the fund-provisioning measure, and fostering international cooperation, the BOJ is well-positioned to navigate the challenges posed by climate change and ensure the stability of the Japanese economy.