Japan’s Record 2026 Budget and Green Spending Priorities

Japan’s cabinet approved a record draft budget for fiscal 2026 that dramatically expands spending on green energy, nuclear power, and clean technology. The Ministry of Economy, Trade and Industry set aside JPY49.7 billion (approximately US$317 million) to support mass production of perovskite solar cells, JPY12.2 billion (US$77.8 million) for preliminary surveys to extend offshore wind farm development into the country’s exclusive economic zone, and another JPY36.3 billion (US$231 million) to bridge price gaps for hydrogen and other high-cost clean fuels to encourage wider adoption.

Under a new “GX Strategic Regions” programme, the government allocated JPY2.1 trillion (US$13.4 billion) over five years to subsidise corporate investment in factories and data centres running entirely on nuclear or renewable power, with JPY40 billion (US$255 million) earmarked for 2026 alone. These figures signal that Tokyo is moving beyond policy declarations into concrete, large-scale financial commitments designed to reshape the country’s industrial foundation.

This approach is part of Japan’s revised energy and climate plans, which emphasise a dramatic expansion of renewable energy and maximum safe use of nuclear power alongside energy efficiency, hydrogen, and carbon capture technologies to balance decarbonisation with energy security and economic growth. The scale of public financing being deployed reflects the government’s view that market forces alone cannot drive the energy transition at the speed or scale required.

The Hydrogen Society Promotion Act and CFD Subsidy Framework

Central to Japan’s hydrogen investment landscape in 2026 is the Hydrogen Society Promotion Act, a legislative framework that establishes the legal and financial scaffolding for a government-backed hydrogen economy. The Japanese government introduced key incentives for the hydrogen business under this framework, including financial support for infrastructure development, support for hydrogen supply infrastructure in selected areas, and access to a Long-term Decarbonisation Power Auction in which hydrogen-use power plants can participate and receive capacity payments covering capital expenditures.

Government subsidies, equity investments, and corporate financing represent the main sources of funding for green hydrogen projects, with project financing considered viable for developers who obtain financial support pursuant to the Hydrogen Society Promotion Act. This layered financing model is designed to reduce risk for private investors while ensuring that public funds catalyse broader market activity rather than substitute for it.

The Japanese government plans to spend JPY3 trillion (approximately US$20.3 billion), financed through Green Transformation transition sovereign bonds, over the next 15 years to subsidise the production, storage, distribution, and utilisation of cleaner hydrogen. In addition, the Green Innovation Fund will invest approximately US$14 billion directly in hydrogen-related research and development over the next decade, and aims to stimulate an additional US$10 billion in private investment over the same period.

The CFD Programme Gains Momentum After a Slow Start

After an underwhelming initial phase of its 3 trillion yen (approximately US$19 billion) hydrogen subsidy scheme, Tokyo moved the programme forward by selecting power giant JERA and trading house Mitsui for supplies from their 1.4 million ton per year Blue Point blue ammonia project in the United States — the first overseas project certified under the contract-for-difference (CFD) scheme.

The first two awards under the CFD programme involved a 1,600 ton per year green hydrogen project led by Toyota Tsusho and a 20,000 ton per year hydrogen-ammonia project by chemical firm Resonac. Their small scale and slow pace initially raised questions about the programme — particularly whether project costs were coming in higher than anticipated. However, industry insiders maintained that government agencies were deliberately taking time to assess unfamiliar programme structures and project types.

Tokyo is expected to make further awards before wrapping up the first stage of the CFD programme, with a decision on whether to launch a second round to follow after a review of the first. This deliberate pacing reflects Tokyo’s effort to learn from early implementation before scaling up financial commitments — a cautious but structured approach that has been both praised for prudence and criticised for slowing private investment momentum.

International Partnerships: Australia, the Middle East, and North America

Japan’s hydrogen ambitions extend well beyond its domestic borders. Recognising that domestic renewable energy resources cannot alone meet the scale of hydrogen it requires, the government has been systematically building an international supply chain. Japan has pursued hydrogen partnerships with Australia, the Middle East, and the United States to secure future supplies, though the global supply chain for renewable hydrogen remains in its early stages.

Some Japanese companies are investing in hydrogen and its derivatives for end-use in select Southeast Asian countries, focusing on sectors such as ammonia co-firing for power generation and the use of hydrogen in the power and transport sectors. This is part of the Asia Energy Transition Initiative launched in 2021 by the Japanese government and reinforced by the Green Transformation Basic Policy unveiled in December 2022.

Through the Asia Zero Emissions Community, Japan aims to support Asian countries facing similar challenges in achieving carbon neutrality through technologies such as hydrogen and ammonia, while recognising their different national circumstances. Companies such as JERA and IHI Corporation are at the frontlines of these regional efforts. This multilateral approach positions Japan not merely as a hydrogen importer, but as a technology exporter and regional decarbonisation leader — a dual role that underpins both its climate strategy and its industrial competitiveness agenda.

However, headwinds from shifting US policy have complicated certain international plans. Japanese firms had been attracted to US low-carbon projects by the generous Inflation Reduction Act incentives promised under the previous Biden administration, but under the Trump administration, the eligibility window for the “45V” hydrogen production tax credit was tightened substantially, effectively disrupting planned green hydrogen projects that relied on it. Several US blue hydrogen and ammonia projects involving Japanese firms as investors or offtakers have faced setbacks due to high costs, weaker-than-expected demand, and changes in policy support — including ExxonMobil’s Baytown project involving JERA, Mitsubishi, and Marubeni.

Japan’s Revised Hydrogen Strategy: The Safety Plus 3E Framework

Japan’s 2017 Basic Hydrogen Strategy charted an ambitious course by calling for the eventual establishment of a decarbonised hydrogen supply chain, underpinned by domestic innovations such as Toyota’s fuel-cell technology and the launch of the world’s first liquefied hydrogen carrier, the Suiso Frontier. By 2023, practical challenges required a strategic recalibration.

The revised strategy adopted a more pragmatic “Safety + 3E” framework, emphasising safety, energy security, economic efficiency, and environmental sustainability. It outlined a JPY15 trillion (approximately US$100 billion) public-private investment plan and stressed international partnerships. The update also signalled a shift toward green hydrogen aspirations, aligning with Japan’s 2050 carbon neutrality commitments and global trends.

While Japan has committed to procuring 12 million tons of hydrogen annually by 2040, the government has yet to specify how this hydrogen will be allocated across key sectors — a gap that complicates investment planning and policy alignment, leaving stakeholders to navigate a market whose future scale and composition remain uncertain. Addressing this allocation ambiguity is widely considered one of the most pressing near-term policy priorities for investors and project developers seeking greater predictability.

Toward a Hydrogen Market: Tokyo Commodity Exchange Initiative

In December 2024, the Tokyo Commodity Exchange, in partnership with the Tokyo Metropolitan Government, launched a trial initiative to develop a hydrogen trading platform. This pilot programme aims to establish the basic rules and operational structure for a future hydrogen market, marking the world’s first effort to create institutional foundations for market-based hydrogen trading and price discovery.

The absence of transparent pricing benchmarks has long been identified as one of the fundamental barriers to scaling the hydrogen economy. Without reliable price signals, investors cannot confidently model long-term project returns, and potential buyers cannot compare hydrogen against competing fuels on an equivalent basis. The Tokyo Commodity Exchange initiative is designed to address this market infrastructure gap directly — establishing hydrogen as a legitimately tradable commodity rather than a custom-negotiated resource. Early results from the pilot are expected to inform the design of a more permanent trading framework in the years ahead.

Technology Leadership and Patent Position

Japan’s investment strategy is reinforced by a formidable technological base. Early initiatives have positioned Japan as a technological leader in hydrogen, with the country holding approximately 24% of global hydrogen-related patents and pioneering innovations across the supply chain. This intellectual property advantage is strategically significant: as global demand for hydrogen technology grows, Japan’s patent portfolio creates opportunities for licensing revenue, joint ventures, and export-driven economic growth.

Japan has a broad end-use approach that looks at power, transportation, residential, heavy industry, and potentially refining. The country continues to invest in fuel cell technology and seeks to be a top global exporter of fuel cell systems. Japan’s national R&D agency, the New Energy and Industrial Technology Development Organisation, is in the process of funding hydrogen projects with US$2.7 billion allocated to establish a large-scale hydrogen supply chain and US$700 million allocated to generate green hydrogen — funding drawn from the US$20 billion Green Innovation Fund.

GX Transformation Bonds and Long-Term Financing Architecture

In order to shift to a society, economy, and industrial structure centred on clean energy, it is anticipated that approximately 150 trillion yen in investment will be required via public and private partnerships over the next decade. As a framework for policy responses to draw such investment, five pillars have been outlined: budgetary measures, regulations and systems, financial packages, step-by-step development of the GX League, and global strategies.

The GX Transition Bonds represent a novel and significant instrument in Japan’s green finance toolkit. By issuing sovereign bonds explicitly linked to green transformation spending, the government creates a direct accountability mechanism while tapping into the growing pool of global ESG-oriented capital. The bonds are structured to be repaid through future carbon pricing revenues as Japan’s emissions trading system matures — creating a long-term fiscal loop that ties today’s clean energy investment to tomorrow’s carbon market proceeds.

Infrastructure development support under the regulatory framework involves the provision of subsidies to support certified business operators’ installation of supply facilities for joint use in the storage or transportation of low-carbon hydrogen, with targets including pipelines, tanks, and other facilities for transportation and storage. These infrastructure subsidies are critical for creating the physical networks that will allow hydrogen to flow from production sites to industrial and power generation end-users at commercial scale.

Hard-to-Abate Sectors and the Expanding Policy Perimeter

Hard-to-abate industries such as heavy industry and shipping are looking for stronger support as Japan’s emissions trading market, GX-ETS, shifts from voluntary to mandatory participation for large emitters, and as the European Union’s Carbon Border Adjustment Mechanism begins to take effect. The convergence of domestic carbon pricing and international trade measures is creating a new layer of investment urgency for industries that have historically been slower to decarbonise.

For sectors such as steel, cement, chemicals, and maritime shipping, hydrogen and ammonia represent some of the only viable decarbonisation pathways at commercial scale. The combination of mandatory GX-ETS participation and CBAM exposure is expected to accelerate corporate decision-making around low-carbon fuel investments, driving demand into Japan’s expanding hydrogen subsidy programmes. Analysts widely expect that the hard-to-abate sector’s growing engagement will be a key driver of hydrogen market growth over the next five years.

Japan’s regulatory framework for these sectors continues to evolve. Business operators that manufacture, import, and supply low-carbon hydrogen domestically, as well as those that use low-carbon hydrogen as energy and raw materials, must prepare a joint business plan for the supply of low-carbon hydrogen and submit it to the competent minister. This mandatory planning requirement is designed to create transparency in the hydrogen supply chain while ensuring that government subsidies are matched by credible, coordinated private sector commitments.

Key Investment Themes for 2026 and Beyond

Japan’s green energy and hydrogen landscape in 2026 presents a complex but increasingly defined set of investment themes. Several major areas stand out as particularly significant for investors tracking this space closely.

The contract-for-difference subsidy structure represents one of the most direct investment mechanisms currently active in the Japanese market. Projects that secure CFD certification gain long-term revenue visibility through guaranteed price support, reducing the financial risk that has historically deterred private capital from early-stage hydrogen projects. JERA and Mitsui’s success with the Blue Point certification serves as a proof-of-concept for the programme’s viability at commercial scale.

Perovskite solar is another area attracting significant capital, with Japan viewing the technology as a next-generation complement to conventional silicon photovoltaics — particularly suited to building-integrated applications where traditional solar panels cannot be deployed. The government’s JPY49.7 billion allocation for mass production support signals a serious industrial bet on perovskite’s commercial potential.

Offshore wind development is expanding into Japan’s exclusive economic zone for the first time, opening up vast new areas for project development beyond the existing near-shore zones. The preliminary survey funding allocated in the 2026 budget is expected to lay the groundwork for a new generation of large-scale offshore wind auctions over the next decade.

Challenges and Risks Facing Japan’s Hydrogen Ambitions

Despite the scale of Japan’s commitments, significant challenges remain. A major barrier to hydrogen’s integration into the mainstream energy economy is the lack of a mature trading and pricing infrastructure. Hydrogen is largely a custom commodity with no transparent benchmarks, contracts, or trading platforms, and this lack of market structure limits scalability and deters investment.

Cost remains the most fundamental challenge. Japan’s strategy aims to cut the cost of producing a kilogram of clean hydrogen to US$2 by 2026 and US$1 by 2030, down from current production costs of US$3–12 per kilogram depending on the production method and location. Achieving these cost targets requires simultaneous progress on electrolyser manufacturing scale, renewable electricity cost reduction, and logistical infrastructure development — a convergence of factors that no single actor can control.

Geopolitical risk also plays a growing role. Japan’s dependence on imported hydrogen creates exposure to supply chain disruptions, partner-country policy shifts, and price volatility — risks that became viscerally apparent following the Russian invasion of Ukraine and the subsequent restructuring of global energy trade flows. Diversifying the supply base across multiple geographies and production pathways is now a core objective of Japan’s revised strategy, though building that diversification takes time and capital.

Conclusion

Japan’s green energy and hydrogen investment strategy in 2026 represents one of the most comprehensive and financially substantive national energy transitions underway anywhere in the world. Backed by a record budget, a legally grounded subsidy architecture, an expanding international partnership network, and a formidable domestic technology base, Japan is moving from strategic declaration to operational execution. The CFD programme is gaining real traction, the GX Strategic Regions initiative is channelling capital into clean industrial infrastructure, and the Tokyo Commodity Exchange’s hydrogen trading pilot is laying the groundwork for the market mechanisms that long-term investors require.

Significant challenges persist — from cost reduction targets that remain ambitious to supply chain uncertainties and the shifting landscape of US energy policy. But the direction of travel is clear and increasingly well-funded. For investors, policymakers, and energy industry participants tracking the global energy transition, Japan’s hydrogen and green energy strategy in 2026 warrants close attention. The decisions being made now — on subsidy design, international partnerships, carbon pricing, and infrastructure — will shape the contours of Japan’s energy economy for decades to come.