Investments in Japan need to create value in the energy transition

Photo by Aleksandar Pasaric

Key points

• Japan plans to spend ¥10tn(US$64bn) a year to crowd in private investment and generate ¥370tn($2.4tn) in public and private capital by 2040.

• With 65% of capital deployed by major Japanese companies reportedly destroying value, then policymakers need to scrutinise government-backed projects more closely, argues ACCR’s Sam Hall.

• He warns that support for hydrogen injection, carbon capture and ammonia co-firing could prolong costly, high-emitting technologies instead of accelerating cleaner alternatives.

• Stronger disclosure rules and investor engagement could redirect funding towards technologies such as electric-arc-furnace steelmaking, battery storage and renewable power, he says.

Japan has introduced a new growth strategy to increase public spending by ¥10tn (US$64bn) a year, with the intention of crowding in further private investment into the economy and generating at least ¥370tn ($2.4tn) in public and private investment by 2040.

But around 65% of capital deployed by Japan’s largest companies destroys value, Japan’s Ministry of Economy, Technology and Industry (METI) finds.

If Japan’s economy has been plagued by value destruction, as METI finds, then it’s squarely in the interests of policymakers and global investors to make sure this tidal wave of investment is fully harnessed and flows into technologies with the highest potential for decarbonisation, value creation, and future competitiveness.

Both METI and Japan’s financial regulator, the Financial Services Agency (FSA), have encouraged companies and investors to move away from the short-term, passive investment approaches born out of low-growth, deflationary economic conditions, and instead pursue bold, long-term growth investments.

Policymakers will likewise need to develop ways of assessing company investment plans to make sure public funding support goes to those with the most value-generating potential. Policy support also needs to be nimble enough to course-correct: technology and investment opportunities will continue to shift as the energy transition unfolds.

Investors – with their expertise in capital allocation and risk assessment – can play an important role in helping Japanese policymakers establish frameworks which enable robust assessment of investment plans and technology potential.

Investors can draw on their experience in evaluating company investment plans and strategy to engage in dialogue with policymakers about what new disclosure…