Improved data is essential for Japan's banking sector climate stress tests

In a recent development, Sayuri Shirai, a former board member of the Bank of Japan (BoJ), has criticized the central bank for the limited scope of its climate analysis. The analysis, conducted by the BoJ and Financial Services Agency (FSA), focused on three major banks and only involved short-term transition plans to 2030, failing to address physical risks.

Shirai suggested that the BoJ could be more ambitious in its analysis, increasing coverage each time, similar to what other countries have done. She emphasized the need for a clearer reflection of the sense of urgency regarding climate change in the regulators' findings.

The BoJ has a green loans scheme, which already requires climate disclosures from numerous Japanese banks. However, the climate scenario analysis conducted by these banks relied on sector-level data based on long-term modeling rather than borrowers' transition plans. This approach has been criticized for its lack of detail in the findings.

Mitsubishi UFJ Financial Group (MUFG) and Mizuho Financial Group are among the banks that have participated in a comprehensive climate scenario study. Shirai noted that approximately 30 more banks should be involved in future studies to improve the scope and accuracy of the results.

The three banks conducted risk analysis using in-house models, which were criticized by the FSA and BoJ for their methodology and data. While the FSA and BoJ said the losses would be small, credit losses in the delayed adaptation scenario were estimated to be 2.3 times those in the first scenario.

Shirai also pointed out that many banks did not experience any impact from the analysis conducted by the regulators. She implied that the scenarios used by the regulators may be underestimating losses, potentially leading stakeholders to underestimate the risks.

In contrast, the Bank of Korea has conducted climate stress tests for 14 financial institutions, including seven banks. The report from Japanese regulators has been criticized for lacking numbers on capital ratio and nonperforming loans, making the provided picture incomplete.

As of August 12, 2025, this article serves as a critical examination of the current state of climate analysis in Japanese banking, highlighting the need for a more comprehensive and accurate approach.