Are Japan's GX Bonds Good Enough For Driving Sustainability?

This blog is based off of the articles: 

Mundy, S. (2024). Unloved transition bonds are big in Japan. The Financial Times. https://www.ft.com/content/ea9c24cc-be8c-4f01-bb59-e80c3c6e4b5d

And

Yoshida, K. & Temple-West, P. (2025). Investors risk overlooking Japan’s green investment opportunities. The Financial Times. https://www.ft.com/content/3cd9e83f-166f-49c7-8a97-aa6d09504471

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What Are GX Bonds?

In February of 2024, the Japanese government started issuing Japan Climate Transition bonds (referred to as GX bonds), with the goal of supporting their Green Transformation (GX). Exploring this topic, this blog will be based off Financial Times articles written by Mundy (2024) and Yoshida & Temple-West (2025). 

The GX is Japan's initiative to:

"[Transform] the entire economic and social system from an economy, society, and industrial structure dependent on fossil fuels to “structures driven by clean energy” – the aim of the initiative is to drive economic growth and development through emissions mitigation." (GR Japan, 2023)

The bonds issued by Japan are intended to fund this initiative and assist Japan's movement towards the goal of nationwide carbon neutrality by 2050. It's important to note that GX bonds are not traditional green bonds but are instead an example of transition finance; targeting incremental emissions reductions in sectors like energy and heavy industry, creating an increase in sustainability that's not as green as green bonds promote.

A Theoretical Lens Into The Struggles of GX Bonds

The Green Bond Principles, established by the International Capital Market Association (ICMA), require strict transparency in use of proceeds, project selection, and reporting (ICMA, 2022). Transition bonds like GX lack such universal standards, creating ambiguity. For instance, Japan’s GX strategy allocates funds to controversial projects like coal plants retrofitted to burn ammonia. This is a very marginal improvement and therefore an arguable example of transition washing. 

The Climate Bonds Initiative (CBI) endorsed Japan’s framework, which is a good sign for the GX bonds, but this is also strange since the CBI previously publicly opposed bonds in Europe which aimed to finance natural gas plants that had the intention to transition away from coal. With Japan's GX bonds supporting projects like burning ammonia alongside coal in power plants, I'm concerned about this lack of consistency in standards from the CBI. Additionally, with the GX bonds, there is no greenium. The absense of a greenium reflects the "transition bond" status as well as the possibility that investors doubt the ability of the bonds to actually create change in the shift towards sustainability. 

Why GX Bonds Have Not Been Successful

Japan's GX plan has not been as popular as hoped, and for good reason. There is heavy criticism around the use of the bond money for keeping heavy polluters in business, spending capital on transitioning large entities instead of investing in disruptive companies that are already sustainably structured. I agree with these criticisms because although my beliefs align with the goal of creating sustainable economies and reducing emissions, I don't believe the use of these funds are being used in radical enough ways. I agree with the criticism brought forward by Mundy (2024) that it would be better to close large polluters such as coal plants and instead use more renewable sources of energy.

While a lack of radicality may be putting off some green investors, a lack of awareness seems to be an additional issue for the selling of GX bonds. A 2024 survey including senior portfolio managers and ESG professionals found that only 1% of participants had heard of GX bonds (Yoshida & Temple-West, 2025). With the Japanese government planning on issuing $129 billion of GX bonds in the next 10 years, it is strange to me that only a small number of investors had heard of the plan. This lack of awareness among non-governmental investors is reflective of the bond performance with approxiamately half of the issued bonds so far being purchased by the Bank of Japan or Japan’s Government Pension Investment Fund. 

I believe that the bonds would be better off should they be more green, instead of choosing the less radical and more ambiguous "transition" status. It appears a key reason why these bonds have not sold well to investors is because of the way the money raised by the bonds is being used. The lack of a greenium reflects low demand and skepticism from investors. Green bonds typically see higher demand and better market performance due to their alignment with clear sustainability goals. Had Japan structured its GX bonds as green bonds in alignment with ICMA's Green Bond Principles, there would likely be greater investor confidence and participation. This shift could have not only improved bond sales but also contributed more directly to Japan’s long-term carbon neutrality goals.

By opting for a transition label, Japan weakened appeal for the GX bonds. A more ambitious, green approach could have positioned them as a more attractive and effective financial tool for driving sustainable change.

References:

Gr Japan. (2023). OVERVIEW OF JAPAN’S GREEN TRANSFORMATION (GX). GR Japan. https://grjapan.com/sites/default/files/content/articles/files/gr_japan_overview_of_gx_plans_january_2023.pdf

ICMA. (2021). The Green Bond Principles. The International Capital Market Association. https://www.icmagroup.org/sustainable-finance/the-principles-guidelines-and-handbooks/green-bond-principles-gbp/