The coordinates of geopolitics, which have long provided orientation, have begun to falter. The belief that ever greater economic integration would inevitably lead to a sustainable security architecture has been shaken. International crises, like the Covid pandemic before it, have revealed how vulnerable highly efficient “just-in-time” supply chains are. In the future, however, they will not only have to be rebuilt in terms of their resilience. The effects of a global division of labour on climate change must also be taken into account.
Against this backdrop, Germany and Japan see themselves called upon to play a decisive role in Europe and Asia as stabilising, technologically and economically leading forces. Both countries are united not only by a social system based on trust in universal values such as democracy and the rule of law, but also by the challenge of securing their supply of raw materials.
Industrialised nations in harmony
The harmony is no coincidence. The Japanese and German economies have a similar structure. Both countries successfully rebuilt their countries after the Second World War with the help of clever policies and the sensible use of financial instruments – the Marshall Plan in Europe and the Dodge Line in Japan. Two of the leading development banks were also established at that time: KfW in Germany and the former JEXIM in Japan, now known as JBIC. The world’s third and fourth largest economies are industrialised nations with a broad, historically grown industrial base and deeply interwoven into the global division of labour, both traditionally strong in technical innovation. In the spirit of long-standing friendship, joining forces to form a transformation partnership was an obvious choice, and the focus today is on the stability and resilience of supply chains in the transformation to Net Zero.
Germany and Japan are historically among the largest CO2 emitters per capita and in absolute terms. However, both are also signatories to the 1997 Kyoto Protocol and the 2015 Paris Agreement on climate change. Since then, both countries have embarked on the journey. After initial successes, both face a Herculean task to further reduce emissions significantly and quickly. The adaptation costs are estimated at 10 tr. Dollar in Japan by 2050 and 7 Bill. Dollars in Germany by 2045. Even though Germany and Japan will have the equivalent of USD 2.8 trillion and USD 1.8 trillion respectively in household assets in 2021. USD in 2021, Germany and Japan have two of the world’s largest capital pools, the financing requirements exceed the respective capabilities of both countries.
Reducing cluster risks through market access
This is because financial market regulation prohibits many players from taking on bulk risks in sectors and companies when it comes to financing. This reduces the availability of capital stock for financing domestic infrastructure projects. Both countries therefore need reciprocal access to the other country’s market in order to fulfil requirements such as risk diversification. Access to the world’s largest capital market in the USA is also necessary.
It is not only industrialised countries that are dependent on access to finance for a successful transformation. Around two thirds of all CO2 emissions are currently generated in the Global South, where financing costs are 2.5 times higher than in the industrialised nations. A historic effort is needed to reduce these costs and mobilise capital. KfW and JBIC have the tools and expertise to structure the financing of such a transition in a way that allows private capital to flow in sufficient quantities and at an affordable cost.
Sharing expertise
But capital alone does not make for successful financing. Such a far-reaching transformation, which encompasses the entire value chains of all sectors, is breaking new ground in many respects. Pioneering spirit and hard work are required. Valuable expert knowledge is created and collected in the financial centres during the financing process. In a culture of open exchange of information and best-practice solutions, this pooling of expertise multiplies the chances of success. The will for open cooperation between the financial centres in Germany and Japan is greater than ever, and both countries have the structures in place to underpin political goals with suitable financial instruments.
To turn political decisions into action, banks will play a crucial role in channelling and leveraging public and private funds and as risk aggregators and managers. Specifically, financial institutions create awareness of risks in global supply chains through risk assessments in lending and credit monitoring processes as well as in other forms of debt and equity financing or the management of guarantees. They can also offer hedging and trade finance solutions that protect against price, credit and exchange rate risks.
In summary, international financial centres can, must and want to play a leading role in finding solutions to the challenges ahead. Germany and Japan and their respective financial centres can play a pioneering role by improving mutual cooperation and networking.
Source: Guest article in the Börsen-Zeitung of 16 January
This is an automated translation of the German original.
