By Leika Kihara and Takahiko Wada

TOKYO (Reuters – Japan has a need for a quicker “third arrow,” growth strategy. It should promote a carbon neutral society and create a Tokyo financial hub to support Asian businesses looking to get green. Hiroshi Nakaso is considered a top-runner to lead the nation’s next central banking chief.

The economy was rebalanced by massive monetary stimulus and fiscal stimulation in 2013, which were the second “arrows” under then-premier Shinzo Abe’s Abenomics policies. However, the third and final reform was not able to propel an economy beyond 1%.

Nakaso (former deputy governor of Bank of Japan) stated that steps to increase capital expenditure on green projects could help Japan grow and act as an upgrade in its growth strategy.

Abenomics is the best way to revitalize Japan’s economy. He said that the burden was too heavy on the two first arrows, particularly in monetary policy.

In a interview, he stated that short-term interest rates are still negative, and the BOJ’s balance sheet has risen to 4.5x the level it was before its massive asset-buying program.

Nakaso declared, “The third arrow must fly faster than the first.”

He said that Japan would benefit from steps to reach carbon neutrality, as it had been struggling to increase its potential growth.

Japan’s growth potential would increase, allowing firms to raise wages and provide households with more buying power.

BOJ watchers and insiders consider Nakaso a strong candidate for the role of BOJ Governor Haruhiko Kuroda’s successor when his term ends in April. The Organization of Global Financial City Tokyo is a consortium of private and public entities that aims to improve Tokyo’s status as a financial center.

Nakaso said that if the public accepts higher prices, then interest rates will rise and the BOJ can normalize monetary policy. He has strong ties to officials from Prime Minister Fumio Kishhida’s government.

He stated that Japan should be a hub in Asia for the sale of transition bonds. These are high-emitting companies who want to make their businesses more environmentally friendly.

Asian businesses are heavily dependent upon fossil fuels. They may not be able to switch to green immediately. Nakaso suggested that Japan may be able to help these firms build a vibrant financial transition market.

He stated that transition finance was important for both Japanese and Asian firms as well as those in Japan’s supply chains.