Investment Trends in Japan’s Overseas Coal Business: A Sector-by-Sector Empirical Analysis

Increasing studies have demonstrated the incompatibility of long-term coal combustion with the Paris Agreement’s temperature targets, thus driving calls for a global phase-out of coal-fired power plants (CFPPs) and coal mining. With numerous business sectors involved in the international coal business such as power utilities, mining companies, equipment manufacturers and financial institutions, examining recent investment trends and business strategies is key to understanding the plausibility of achieving a global coal phase-out and drivers or barriers affecting this process. As the second largest financer of CFPP constructions abroad and a major investor in international coal mining, the investment strategies of Japanese firms are critical to future global coal consumptions trends. This paper examines recent investment trends and business strategies of Japanese business corporations engaging in either international coal mining or construction of new CFPPs. By examining general trading companies, electricity utilities, equipment manufacturers and financial/insurance firms our empirical analysis identifies sector-specific trends and factors affecting investment behaviour in each. Data is sourced from approximately 15 interviews and document analysis. Overall, no sector is moving completely out of coal-related businesses. For general trading companies, while most are reducing the scale of their international coal-fired electricity generation portfolios and ceasing investments in new thermal coal mining projects, all remain committed to new CFFPs constructions and coking coal mining. Meanwhile, utilities and equipment manufacturers continue to pursue new CFPP construction projects. This is influenced by business model lock-in whereby firms possess much expertise from domestic CFPP projects but lack international competitiveness in renewables manufacturing and project implementation. In the finance/insurance sector, although all are tightening lending criteria, mega banks are committed to funding international CFPP construction if compatible with OECD guidelines and Japanese government policy. While life-insurance firms are explicitly withholding funding in new coal projects, their political influence is limited due to a insignificant involvement in financing and investment relative to banks. Although international and domestic divestment trends are influencing investment behaviour in the finance/insurance sector, general trading companies, equipment manufacturers and utilities are less affected, with behaviour mostly explained by the improving economics of international renewable energy projects. Banks share a dilemma where rejection of finance for a certain coal project on grounds of climate mitigation might result in the loss of this client in other project finance deals. While all sectors understand that thermal coal and coal-fired electricity markets will decrease significantly in coming years, most firms remain committed to participating in overseas new CFPP constructions while mitigating future risks by expanding renewable energy portfolios. Findings also revealed an economic dilemma for all sectors where the withdrawal of Japanese firms from a CFPP construction project would fail to trigger its abandonment due to aggressive participation in international bidding by Chinese and Korean counterparts. Findings thus highlight the need for a tighter global governance mechanism for regulating the nature of new CFPP projects in developing countries—both with and without domestic coal reserves—in line with global climate mitigation objectives.