* BOJ may forgo interest reward in climate scheme - sources
* BOJ’s climate drive complicated by lack of definition on “green”
* BOJ may include transition finance as eligible loans - sources
* BOJ to release outline of climate scheme at July 15-16 meeting
TOKYO, July 8 (Reuters) - Japan’s central bank will likely offer zero interest, long-term funds to commercial lenders that provide loans or investment for activities aimed at combating climate change, said sources familiar with its thinking.
The plan will be part of an outline due next week that lays out details of the Bank of Japan’s new loan scheme, which is designed to encourage green finance. The move would put the BOJ in line with a growing number of central banks stepping up efforts to address the economic fallout of climate change.
While details are still unclear and being hashed out, the climate scheme would in practice be similar to other BOJ loan programmes that pump money to the economy through the banking system.
But the BOJ’s drive is complicated by the fact that there is no clear definition of what a “green” loan is, potentially putting it in a tight spot if some of the loans turned out to be less environmentally friendly than flagged by the banks.
Policymakers are thus wary of offering more incentives such as paying interest to banks that tap the scheme, like it does for another loan programme aimed at aiding coronavirus pandemic-hit firms, say five sources familiar with the BOJ’s thinking.
“Climate change is an area with a lot of uncertainty. The new scheme will only be a starting point,” one of the sources said, a view echoed by four other sources.
The BOJ will release an outline of its scheme at its next policy meeting on July 15-16 and aims to roll out the first batch of loans by the end of this year.
In the outline, the BOJ is likely to earmark zero interest, long-term funds for banks that boost loans or investment for activities aimed at combating climate change, the sources said.
It will also consider including “transition finance”, or lending to help polluting firms shift to greener operations, among loans eligible for the scheme, they said.
But the BOJ may forgo rewarding 0.1% or 0.2% interest to banks that tap the scheme and instead offer as an incentive longer-than-usual loans that extend for several years, the sources said.
“With the definition of green so vague, it may be hard for the BOJ to offer too many incentives,” a second source said.
Discussions are still preliminary and subject to change as there is no consensus yet within the BOJ on the terms of the funding.
The BOJ may not disclose the size of the scheme next week due to a lack of data on Japan’s green finance market, which remains small compared with that of Western nations, they said.
The scheme aligns with Prime Minister Yoshihide Suga’s pledge to make Japan carbon-neutral by 2050, a goal considered ambitious for a country heavily reliant on energy imports.
It also comes as central banks globally contemplate steps to tackle climate change. The European Central Bank will lay down its role on climate change later on Thursday.
Japan’s megabanks have come under increasing pressure to halt financing for coal-fired power plants, as governments and companies across the globe move toward decarbonisation.
The BOJ’s scheme is the first among central banks that target bank loans, in contrast to ideas contemplated by others that use collateral or asset-buying schemes in directing money into environment-friendly businesses.
The BOJ already has several loan schemes in place, including one that rewards 0.1%-0.2% interest to banks that boost lending to small firms hit by the pandemic.
(Reporting by Leika Kihara and Takahiko Wada; Editing by Sam Holmes)