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

The Bank of Japan (BoJ) and the Financial Services Agency (FSA) have come under scrutiny for their recent climate stress tests, with Professor Sayuri Shirai, a former board member of the BoJ, leading the charge.

According to Shirai, the discrepancies between climate scenarios and individual borrowers' transition strategies may impact the outcomes of scenario analysis. This criticism follows the BoJ's assessment that Japan's financial institutions need to improve the connection between climate stress tests and borrowers' transition plans.

Three scenarios were considered by the banks: no additional climate policies, strict reductions in emissions, and the same level of emissions reduction with delayed adaptation, resulting in price increases and declining profitability. However, Shirai has pointed out that the banks' risk analysis relied on sector-level data and long-term modeling, rather than the transition plans of their borrowers, due to a lack of comparable information.

The BoJ and FSA have been criticized for lacking detail in their findings regarding the connection between climate stress tests and borrowers' transition plans. Shirai has suggested that the BoJ should be more ambitious with its analysis and increase the coverage in future assessments. She also expressed a need for a clearer reflection of the sense of urgency regarding climate change in the BoJ's and FSA's findings.

The BoJ's green loans scheme already requires climate disclosures from numerous Japanese banks. However, Shirai has stated that the lack of numbers on capital ratio and nonperforming loans left the picture provided by the BoJ incomplete. She also criticized the BoJ and FSA for only having three banks conduct the scenario analysis, suggesting they should include a larger number of banks, as other countries have done.

The Development Bank of Japan has conducted climate scenario analyses for more than 14 financial institutions, including at least 7 banks, besides the Bank of Japan and the Financial Services Agency. Despite this, Shirai has noted that a lot of banks do not experience any impact from the analysis conducted by the BoJ and FSA.

While the FSA and BoJ said the losses would be small, credit losses in the scenario with delayed adaptation were estimated to be 2.3 times those in the first scenario. This suggests that the scenarios used by the regulators may underestimate losses, and Shirai has suggested that this could have been made clearer to stakeholders.

Mizuho, MUFG, and Sumitomo Mitsui banks conducted stress tests, but the methodology and data used should be improved, according to the BoJ and FSA. This is another area where Shirai has expressed concern, suggesting that the BoJ should strive for more transparency and detail in its findings.

This article was last updated on August 12, 2025. The Bank of Korea has also conducted climate stress tests for 14 financial institutions, including seven banks, demonstrating a growing global focus on climate risk in the financial sector.