The world is stepping up efforts to hit carbon-neutrality by 2050, especially since Joe Biden became US president. Japan has fallen a little behind other developed nations, due in part to the aftershocks of The Great East Japan Earthquake in 2011, which meant the country could no longer rely on its nuclear power plants.
However, the reforming administration of Yoshihide Suga hopes the nation can catch up in the effort to become carbon neutral and the prime minister is backing up his words with action, as are company boards and investors.
In December 2020, Japan’s ‘Green Growth Strategy’ was announced. By 2050 projections are that renewables will comprise 50-60% of Japan’s energy supply (from 18% currently), while fuel-ammonia and hydrogen will make up 10%. Mr Suga has announced the creation of a 2 trillion yen fund to provide technical support for decarbonisation and the government also plans to provide subsidies to private companies for research and development activities related to renewable energy technologies.
Interest in the green agenda doesn’t stop with government though. Corporate Japan is also ready to take action. The revised Corporate Governance Code (issued in June 2021) required companies to proactively respond to sustainability issues and the environment was a major theme at this year’s AGM season. The number of companies publishing their response to climate change and social issues to shareholders increased rapidly, according to Sumitomo Mitsui Trust Bank.
See also: – Japanese companies make slow progress on governance
State support for zero-emissions goals, and the growing importance of ESG as an investment theme, will open a wealth of opportunity for investors in Japan’s energy sector. Companies promoting technological innovation towards a decarbonized society will therefore have a tailwind on stock prices.
Japanese investment in green energy is likely to be heavily concentrated in a few sectors, such as offshore wind power, hydrogen and digital infrastructure. When it comes to the former, Japan, due to its geography, is set to be one of the big backers of offshore wind power (along with Europe) as it is hard to find enough flat land in the country to make onshore wind power worthwhile.
One company to watch in this space is Renova, a Japanese leader in wind power generation far ahead of its competitors in technological abilities. It is actually the only listed company in Japan that specialises in renewable energy power generation, and aims to develop a large-scale offshore wind power plant off the coast of Akita Prefecture.
Another key part of Japan’s energy strategy is hydrogen. Japan is the first country in the world to formulate a basic hydrogen energy strategy and it is hoped hydrogen powered vehicles will offset some of the issues standard electric vehicles (EVs) have with long-distance journeys. A key stock to consider here is Kawasaki Heavy Industries, a world leader in hydrogen production, transportation, storage and utilization. Kawasaki’s strength lies in its wide-ranging expertise across all aspects of hydrogen energy and it is currently proceeding with the acquisition of intellectual property for the hydrogen cooling and liquefaction process.
Japan also needs advanced digital infrastructure that efficiently adjusts the supply and demand of solar and wind power, because the output of renewable energy sources fluctuates depending on the weather.
In terms of capability to provide the digital infrastructure – or the so-called ‘smart grid’ – needed to manage the renewable energy supply, Osaka Electric and Mitsubishi Electrical Corporation are companies to watch. The former is currently dominant in the smart meter market with a market share of about 40% and a brand that attracts attention. As such it is well placed to leverage its expertise and dominance into producing the smart grid for renewable energy in the country.
As for Mitsubishi Electrical Corporation, it is a highly competitive producer of IGBT (insulated-gate bipolar transistor) modules for power semiconductors, which are used to convert clean energy such as solar power and wind power into electrical energy. The company has the second largest share of IGBT modules in the world (25%, as of 2019), according to Goldman Sachs.
What it is clear overall is that Japan is stepping up its efforts in the field of green energy, with a sustained push from government, business and investors. Heightened interest in the ‘E’ of ESG is spurring innovation and is set to direct fund flows towards environmental leaders. Japan’s unique geography means its decarbonisation drive will differ from its peers among the developed economies but there will be plenty of opportunities opening up for investors in off-shore wind, hydrogen and digital infrastructure as the country strives to reach its renewable energy goals.
