What is Japan investing a huge amount of currency in?

Within a few years, sustainability in the financial world has grown from an afterthought to a major issue. The huge amount of foreign currency reserves that the Japanese Ministry of Finance is investing sustainably indicates that this trend is now also becoming increasingly apparent in the currency world.

In the coming weeks, a lot of attention will undoubtedly be paid to the COP26 climate summit that starts on October 31 in Glasgow. Where a decade ago environmental activists were especially enthusiastic about these kinds of meetings, now the investment world is also watching with interest. Climate change and legislation are having an increasing impact on corporate profits: from oil products to manufacturers of wind turbines and solar panels. A new trend is that sustainability is also playing a greater role within the currency world. Last week it was announced that Japan will take into account factors affecting people, the environment and society in the way it invests its foreign exchange reserves.

10 billion per month
Thanks to a large export industry, Japan has a current account surplus that fluctuates around 10 billion euros per month. Due to the influx of dollars, euros and other currencies, the reserve of foreign currencies has risen to more than 10.000 billion euros. It is not the case that this entire amount is invested in sustainable investments in one fell swoop. Finance Minister Shunichi Suzuki wants to gradually invest in green bonds, among other things. These are loans from which the income is used for sustainable projects, such as the construction of wind farms and solar fields.

Who participates?
Suzuki took advantage of the attention to call on other G7 countries to follow suit. If that happens at all, the impact will be a lot smaller than that of the Japanese initiative. After China, the Asian country has by far the largest foreign exchange reserves in the world. The huge amount that Japan is investing in a sustainable way also means that the plan puts all previous initiatives in the shadows. In recent years, some investment banks have already conducted tests, for example by offering companies discounts when they conclude currency swaps if they achieve certain sustainable goals, such as reducing CO2 emissions. However, these types of transactions were at most a few tens of millions of euros.

October 31 in the agenda
It is no coincidence that Japan is leading the way in starting a sustainable movement in the currency world. Japan is highly dependent on the import of oil and natural gas due to a lack of natural resources. For now, the measure will not have a major impact on the Japanese economy or the yen exchange rate. In the coming weeks, the latter will mainly be determined by the developments surrounding the elections, which are on the agenda for 31 October, just like the start of the climate summit. For the time being, it appears that the LDP party of the recently appointed Prime Minister Fumio Kishida will retain a majority in the Japanese House of Representatives. That would be a favorable development for the moderately growing economy and for the yen.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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