Japan has revised a law to more efficiently use its official development assistance to respond to massive global development financing needs under its limited budget, with increased focus on steps to help mobilize private funds.

The revised law, which came into force Thursday, enables the Japan International Cooperation Agency to support companies in developing nations to issue bonds, such as for green projects, and acquire them in the early stages to lure more investors.

JICA also can provide credit guarantees to entice local banks in developing countries to lend money to small businesses.

Japan has been upgrading its ODA scheme to better respond to the complicating challenges developing countries are facing, such as climate change, poverty and human rights issues, while the role of private sector funds has grown in achieving sustainable development.

Seeing a limit in relying solely on government aid to address development issues, experts have called for using ODA as an incentive for private investment in projects in high-risk countries.

The Asian economy at the same time remains in a tight fiscal situation, with its public debt more than twice the size of gross domestic product.

Government spending for ODA on an initial budget basis has halved from its peak in 1997 to 566.4 billion yen ($4 billion) in fiscal 2025.

Under the amended JICA law, the government-backed aid agency also gained flexibility in its own financing, as it can receive long-term loans from international institutions and can return unpaid funds of suspended grant aid projects to state coffers or use them for other projects.

As of March 2024, 156.1 billion yen was not yet paid out even though JICA had received the money from the Foreign Ministry to carry out grant aid projects, according to a JICA official.

Such funds have accumulated on the back of delays of projects caused by political uncertainty, the COVID-19 pandemic, natural disasters and other issues.

The Japanese government views ODA as one of its "most important diplomatic tools" as it pursues a free and open Indo-Pacific where China has been increasing its military and economic clout.