What shapes greenium in bond markets? Evidence from Japan

In this study, we investigate whether green bonds are issued at lower yield spreads compared to conventional bonds—a phenomenon referred to as the “greenium”. Despite years of research, the existence of a greenium remains inconclusive. To contribute to this ongoing debate, we analyse data from Japan's primary corporate bond market between 2016 and 2023, employing multivariate regression models to assess yield differentials at issuance. We find that the greenium is not universal; it appears only for firms with strong environmental performance, with yield spreads that are 7–17 basis points lower on average. However, the greenium disappears after 2021, coinciding with rising greenwashing concerns and widening global yield spreads. While demand for green bonds appears to matter for the greenium, the post-liquidity difference has little impact. These findings indicate that sustainability performance can influence capital costs, and that credibility and transparency play key roles in maintaining investor trust in green finance.