With nearly 70% of global issuance, Japan leads in transition bonds — but future growth depends on international credibility, investor confidence, and broader adoption.
As the global economy accelerates its push toward net zero, Japan has emerged as the world’s dominant player in the nascent transition bond market — instruments designed to finance decarbonization in hard-to-abate sectors. Bolstered by robust government support, detailed industry roadmaps, and sovereign issuance, Japan now accounts for approximately 68% of global transition bond issuance, with $19 billion outstanding as of mid-2024.
But for the market to thrive, Japan must now scale international investor demand, combat negative perceptions, and strengthen its leadership role in shaping credible global standards.
Transition Bonds: Bridging the Hard-to-Abate Gap
Transition bonds fund companies and sectors that generate high greenhouse gas (GHG) emissions but are committed to credible long-term decarbonization strategies. Unlike green bonds, which finance clearly defined environmentally positive projects, transition bonds support broader sectoral shifts, such as energy efficiency upgrades, fuel switching, or R&D for low-carbon technologies.
For Japan — with a heavy industrial base and an aging energy infrastructure — these instruments are essential for balancing economic competitiveness with climate ambition.
In 2020, Japan committed to becoming a carbon-neutral society by 2050. Achieving that target will require decarbonizing industries that cannot make an immediate switch, such as steel, chemicals, cement, refining, and power generation. Transition finance offers a pathway to support these sectors while ensuring that national emissions continue to decline.
Japan’s Policy-Backed Transition Bond Ecosystem
Japan’s transition finance push is underpinned by a coordinated policy and regulatory framework:
- In May 2021, the Financial Services Agency, Ministry of Economy, Trade and Industry (METI), and Ministry of the Environment published the Basic Guidelines for Climate Transition Finance, modeled on ICMA’s Climate Transition Finance Handbook.
- Technology roadmaps developed by METI for eight carbon-intensive sectors provide specific decarbonization pathways, offering investors clearer insight into use of proceeds and credibility of issuer strategies.
- The Bank of Japan’s Climate Response Financing Operations provide near-zero interest long-term funding to financial institutions supporting climate-aligned projects, including transition bonds.
- In February 2024, Japan issued the world’s first sovereign climate transition bond, with a total program size of JPY 20 trillion (~$135 billion) planned over the next decade to fund the Green Transformation (GX) strategy.
This policy infrastructure has enabled Japan’s market to grow even as transition bond issuance globally has remained cautious, in part due to uncertainties around standards and lingering skepticism.
Why the Global Market Lags — And How Japan Can Lead
Outside Japan, transition bond issuance has remained limited and fragmented. Many issuers opt instead for sustainability-linked bonds (SLBs), which provide greater flexibility by tying general corporate financing to ESG performance targets rather than project-specific use of proceeds.
One key challenge is that ICMA’s Climate Transition Finance Handbook offers disclosure guidance, but lacks specific taxonomies or eligibility criteria, unlike the Green Bond Principles or EU Taxonomy. This leaves room for interpretation — and skepticism.
In some markets, transition finance is viewed with suspicion, seen as a potential mechanism for delaying decarbonization or providing cover for fossil fuel-intensive activities. To counter this, Japan must ensure:
- Credible Disclosure and Verification: Issuers must offer transparent, science-based decarbonization strategies and undergo rigorous third-party validation.
- International Dialogue and Alignment: Japan could deepen collaboration with emerging taxonomies — particularly in the EU and Southeast Asia — to foster a more harmonized global framework.
- Market Liquidity and Investor Appeal: As Japan’s government is now the largest single issuer of transition bonds, ensuring healthy market functioning means safeguarding investor confidence, including through audited impact reporting and expanding the investor base to include retail investors over time.
The Path Forward: From Pioneer to Market Maker
Japan has successfully created a blueprint for how transition finance can support industrial decarbonization. With deep policy support, credible sectoral planning, and early sovereign issuance, it has laid the groundwork for global uptake.
But now comes the hard part: ensuring that the demand side keeps pace. That will require proactive engagement with global investors, robust governance frameworks, and cross-border cooperation to build a credible, scalable transition finance ecosystem.
Done right, transition bonds could become a cornerstone of climate finance — not just for Japan, but for the world’s industrial economies navigating the long road to net zero.
Fast Facts
- Japan’s share of global transition bond issuance: ~68%
- Total transition bonds outstanding in Japan: $19 billion (as of June 2024)
- Target size of Japan’s GX Economy Transition Bond Program: JPY 20 trillion (~$135 billion)
- Sectors covered by METI roadmaps: Steel, chemicals, electric power, gas, oil refining, cement, pulp & paper, and automobiles
- Share of Japan’s CO₂ emissions covered by transition sector roadmaps: ~80%
