Japan extends transition bond push despite fossil-fuel reliance

Japan sold its fifth climate transition bond of the year, remaining the only government to use the designation despite the country’s increasing reliance on fossil fuels since the start of the war in Iran.

The ¥250 billion ($1.6 billion) issuance attracted steady demand with a bid-to-cover ratio of 3.84, compared with 4.62 in May, and an average of 3.79 since issuance began in February 2024. The highest yield accepted was 2.2%.

The sale comes against a strengthening backdrop for the broader domestic bond market.

Japanese government bonds have rallied alongside other so-called safe-haven assets in recent weeks as technology-sector jitters unsettled investors.

That marks a reversal from earlier this year, when concerns about the nation’s fiscal spending and inflation, coupled with a global bond selloff, sent yields to multi-decade highs.

The latest issuance of transition bonds is the 11th by the Japanese government, part of a ¥150 trillion program through 2033 to channel capital to specific emissions reduction programs.

Issuers in the country remain the dominant force behind climate-transition bonds, accounting for about 90% of the market since 2024, according to data compiled by Bloomberg Intelligence.

The Japanese government has issued more than $30 billion of the debt so far, most of it purchased by the Bank of Japan and other local institutional investors. South Korean and Chinese entities are among other issuers that have sold transition bonds.

Environmental think-tanks have criticized Japan for reinforcing its reliance on fossil-fuel imports despite a goal of reducing greenhouse gas emissions by 60% by fiscal 2035 from 2013 levels.

With the Iran war threatening supplies, the government has doubled down on oil, releasing strategic reserves and creating a new plan aimed at diversifying sources away from the Middle East while also investing in new supply.

The country remains the world’s fifth-largest carbon dioxide emitter, with coal, oil and gas accounting for more than 80% of its energy supply last year, according to the International Energy Agency.

Proceeds from this fiscal year’s transition bond sales are earmarked for eligible projects in artificial intelligence, semiconductors, robotics and nuclear technologies such as fusion energy, according to Japan Credit Rating Agency.

Only 4% will go toward making renewable energy “a major power source,” including efforts to build supply chains and promote the use of perovskite solar cells.