Bank of Japan Survey Reveals the Fragility of Climate-Risk Pricing
Matthew Poggi | 25 August 2026
Monetary, Commentary | Tags: Central Banks, Governing Finance, Japan, Systemic Risks
This op-ed was first published in the Weekly Financial and Fiscal Affairs (Kinzai) on 18 August 2026, in Japanese.
The Bank of Japan’s fifth “Market Functioning Survey concerning Climate Change”, released on June 5, found that respondents’ assessment of how well climate-related risks and opportunities are reflected in equity and corporate-bond prices had deteriorated from the previous survey. The results exposed the fragility of climate-related price signals. The particular weakness of the corporate bond market also raises questions about credit-risk assessment and management, as well as financial supervision. This article considers the implications of the BOJ’s findings.
The Middle East crisis exposes the risk of a delayed transition
The rise in fossil fuel prices following US strikes on Iran forced governments and market participants to confront the energy trilemma of security of supply, affordability and decarbonization. When supply insecurity and higher costs arise simultaneously, how do markets incorporate climate-related risks into prices? Are credible transition strategies valued for their ability to strengthen corporate resilience and ease the tensions within this trilemma? Governments and market participants are increasingly being forced to make such decisions.
Policymakers and market participants have long assumed that, as disclosure improves and risk management methods become more sophisticated, markets will gradually incorporate climate-related risks into prices. But this assumption had not been adequately tested under genuine stress.
The recent energy shock increased pressure on security of supply and affordability, prompting short-term policy responses that prioritized securing additional fossil fuel supplies and easing the burden of higher prices. It also demonstrated how the risk of “too little transition”—a slowdown in the shift toward decarbonization—could materialize.
Japan provides a particularly revealing case. It has few domestic fossil fuel resources and remains highly dependent on energy imports from the Middle East. It must therefore address several challenges simultaneously: ensuring stable supplies, limiting the burden on businesses and households, and maintaining its decarbonization strategy.
Against this background, the BOJ’s fifth Market Functioning Survey concerning Climate Change provides important evidence of how market participants assessed climate-related risks under energy security stress. Since 2022, the BOJ has surveyed investors, financial institutions and non-financial companies on the extent to which climate-related risks and opportunities are reflected in equity and corporate bond prices. The 2026 survey was conducted in February and March, when energy market volatility was increasing sharply.
Climate-risk pricing retreats during the energy shock
The survey results show in numerical terms how market participants’ views changed amid energy market volatility. The BOJ’s diffusion index—the difference between respondents who believe climate-related risks and opportunities are reflected in prices and those who believe they are not—fell from 8 to 3 for equities, matching its lowest level since the survey began. In the equity market, respondents who believe climate-related factors are reflected in prices still outnumber those who disagree, but the margin has narrowed.
For corporate bonds, the diffusion index declined from minus 9 to minus 14, erasing the improvement recorded over the preceding two years. Climate-risk pricing therefore remains weaker in the corporate bond market than in the equity market.
This matters for financial institutions and supervisors. Weak incorporation of climate-related risks in the corporate bond market may indicate that physical and transition risks are not being adequately captured in assessments of corporate creditworthiness or in the formation of credit spreads. If markets underestimate these risks during periods of stress, abrupt price adjustments could occur when climate-related risks eventually affect corporate earnings and asset values.
An energy shock of this kind should, in principle, have made climate-related price signals clearer. Higher costs for imported fossil fuels increase the economic value of energy efficiency, diversification of energy sources and low-carbon investment. Companies that remain heavily dependent on fossil fuels, or that lack credible transition strategies, should appear more exposed. Conversely, companies that have invested in efficiency and decarbonization should be valued for their greater resilience.
Despite this, the survey found that climate-related risks and opportunities had become less reflected in prices. This does not mean that climate risk disappeared. Rather, it suggests that the long-term climate signal becomes unstable when concerns about fuel costs, supply constraints and near-term earnings intensify.
Market signals matter most under precisely these conditions. If climate-related risks are reflected in prices only during calm periods, those price signals cannot be considered fully reliable.
The survey also identified a more fundamental difficulty in pricing physical risks. Respondents noted that physical risks such as natural disasters frequently take the form of tail risks, making both their probability and potential impact difficult to estimate. The harder a risk is to assess, the greater the need for comparable information, rigorous scenario analysis and an appropriate risk premium.
Implications for the BOJ as a holder of ETFs and corporate bonds
The BOJ itself should take these findings seriously. Through years of ETF purchases, which ended in March 2024, it has accumulated substantial exposure to the Japanese equity market and now faces the prospect of reducing those holdings over an extended period.
The BOJ also ended its corporate bond purchases in February 2025. Its bond portfolio is expected to decline naturally as the securities mature. If, as the survey indicates, climate-related risks are particularly weakly reflected in corporate bond prices, the issue also affects the assessment and management of risks associated with the BOJ’s own assets.
This does not mean that the BOJ should assume responsibility for climate policy. Rather, climate policy should remain the responsibility of the government. From the perspective of balance sheet management, however, the BOJ should incorporate climate-related risks into its risk management and scenario analysis.
It should be cautious about mechanically assuming that current market prices appropriately reflect climate-related risks.
The lesson for the government is not that markets lack the ability to price climate risk. The problem is that the price signal may become unstable during periods of stress.
Climate change is inherently a structural risk. If markets treat it as a cyclical one, the transition cannot be left entirely to market discipline. The government should establish credible carbon pricing, comparable climate-related data and disclosure that is relevant to corporate valuation. Through financial supervision, it should also encourage financial institutions to incorporate physical and transition risks into their risk-management frameworks.
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