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Top-Down Scenario Analysis of Climate-Related Financial Risks: Perspective from Time Horizon and Inter-Industry Spillovers

December 21, 2023

ABE Nobuhiro*1
TAKANO Yutaro*3
NAKA Tomomi*4
HIRAKATA Naohisa*5

Financial System and Bank Examination Department, Bank of Japan


The use of scenario analysis for climate-related financial risks is progressing in various jurisdictions. In this paper, we conduct a top-down scenario analysis of transition risk for Japanese banks. We analyze a short-term (5-year) scenario, while long-term scenarios of about 30 years are often used in climate-related scenario analysis. In our analysis, we examine two cases regarding the extent to which firms adjust smoothly to carbon price increases: a smooth adjustment case and a slow adjustment case. In addition, we use a multi-sector dynamic general equilibrium model to account for inter-industry spillovers.

There are two main findings of this paper. First, we find that the degree of firms' adjustment leads to substantial differences in credit cost ratios of banks. This suggests the importance of accounting for the degree of adjustment to carbon price increases. Second, we find that the carbon price increase not only has an impact on the directly affected key sectors, but also spreads indirectly to other sectors through inter-industry linkages, resulting in an increase in the credit cost ratio. This suggests that even regional banks with relatively small exposure to key sectors need to pay close attention to the transition risk.

JEL classifications
E10, E17, E44, E47, E65, F20, G10, G21, G28, G38, Q54

Banks' stability, Macro stress test, Climate change, Transition risks, Carbon tax

The authors would like to thank OKUDA Tatsushi, KOGUCHI Hirohide, SUDO Nao, TAKEYAMA Azusa, NAKAMURA Koji, NISHIZAKI Kenji, HASHIMOTO Ryuichiro, and MASAKI Kazuhiro for their helpful comments. Any errors or omissions are the responsibility of the authors. The views expressed here are those of the authors and should not be ascribed to the Bank of Japan and Financial System and Bank Examination Department.

  1. *1E-mail :
  2. *2Currently at Personnel and Corporate Affairs Department
    E-mail :
  3. *3E-mail :
  4. *4Currently at Public Relations Department
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  5. *5E-mail :
  6. *6Currently at Bank of England
  7. *7E-mail :


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