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How Far Away is Japan’s CBDC? Bank of Japan Meets with Monetary Authorities on Potential Digital Yen Issuance

Leaders of the Ministry of Finance (MOF), the Financial Services Agency (FSA) and the Bank of Japan (BOJ) have recently held a number of meetings to examine the possible issuance of their own digital yen in the very near future.

As published by the Japan Times, the most recent meeting took place last month, bringing together Yoshiki Takeuchi, Vice-Minister of Finance for International Affairs; Ryozo Himino, FSA Vice-Minister for International Affairs; and Shinichi Uchida, BOJ executive director for international affairs.

The representatives discussed how the Japanese government’s creation of a central bank digital currency (CBDC) would impact the world economy which currently recognizes the US dollar as the de facto global currency. Meetings so far have also been centred around escalating research efforts.

Japan’s CBDC Push

As reported by Blockchain.News, with significant expertise in exploring digital currencies, six central banks: Bank of Canada, Bank of England, Bank of Japan, European Central bank, Sveriges Riksbank in Sweden, and the Swiss National Bank, along with the Bank of International Settlements (BIS) came together to create a working group to share experiences with use cases on CBDC.

The announcement explicitly stated that the working group would “assess CBDC use cases; economic, functional and technical design choices, including cross-border interoperability; and the sharing of knowledge on emerging technologies.”

The meetings currently underway by Japan’s financial and monetary authorities demonstrate that they are ready to step up cooperation over digital currencies domestically in light of the advancements in digital and financial technology.

While digital currencies are expected to help lower costs related to cross-border financial transactions, such as remittances and settlements, there are concerns they may create opportunities for money laundering and other financial crimes.

Racing China

China’s state-owned bank, the People’s Bank of China (PBoC) has been reportedly charging full speed with its own CBDC development plans in response to Facebook’s Libra. China is not alone though as the social media giant’s attempt at issuing currency appears to have been the catalyst for the global CBDC race, when national monetary authorities worldwide suddenly caught a glimpse of a future where they may very possibly not control the flow of credit.

While Libra may have shaken some feathers, it appears that Japan is equally concerned with China’s ambitions to develop a government-controlled digital currency. On Feb 10, Japanese lawmaker, Kozo Yamamoto called for the expedited development of Japan’s digital yen, hoping for Japan to be the first nation with an operating CBDC.

Yamamoto who is Head of Bank and Finance Systems Research Commission at the Liberal Democratic Party (LDP), said that Japan should create a digital yen, “ within two to three years” as reported by Blockchain.News.

A few days earlier, Norihiro Nakayama, the Vice-Minister for Foreign Affairs in Japan and the top member of the Liberal Democratic Party even reached out to the US Federal Reserve for assistance to outpace China, saying that he wished the “Federal Reserve would partner with the six other central banks including the Bank of Japan in studying digital currencies.”Nakayama added, “We sense the digital yuan is a challenge to the existing global reserve currency system and currency hegemony. Without the US, we cannot counter China’s efforts to challenge the existing reserve currency and international settlement system.”

Nakayama predicted that with the Belt and Road initiative, which includes a digital economic framework, the digital yuan is highly likely to be adopted as the standard of the global digital economy.

Image via Shutterstock

Bank of Japan to Launch CBDC Proof-of-Concept in 2021

The Bank of Japan (BOJ) has revealed its plan to kick start a proof-of-concept phase on the issuance of its central bank digital currency (CBDC) next year. The nation’s central bank reported that it was preparing its issuance capabilities in case of a surge in public demand for digital currency rose rapidly.

Resilience is of the Key

The BOJ report noted that one of the fundamental features of the CBDC would be resilience, even when faced with unforeseeable circumstances like power outages and network failures. It stated:

“Offline use in times of system and network failures, as well as electrical outages, is also important for Japan, given the frequent occurrence of natural disasters.”

As a result, the digital currency will have offline capabilities making it more durable. The early experimentation phase will entail generating a test environment to check its functionality as a payment apparatus.

In July, the BOJ disclosed that it had identified two technical stumbling blocks in the issuance of its digital currency, namely resilience and universal access. Therefore, it seems it has set its eyes on overcoming the resilience challenge, having put the early testing phase in line.

Universal access entails granting entry to everyone, including those who do not use smartphones. The Proof of Concept testing is expected to tackle this technical hitch as it will ensure that the digital Yen is accessible, just like regular currency. Additionally, it will guarantee the availability of the asset should there be a natural disaster.

Stamping authority in the global markets

In the eyes of many nations owning a CBDC is instrumental in having control of the global markets. This can be shown by the fact that the Bank for International Settlements (BIS), along with seven central banks, recently released a report identifying the foundational principles necessary for any publicly available CBDCs to help central banks meet their public policy objectives.

One of the principles highlighted the importance of CBDCs coexisting with cash and other types of money in an innovative and flexible payment system.

The BOJ has been making notable steps as it continues keeping a keen eye on the development of its digital currency. For instance, in July, it announced the appointment of lead economist Kazushige Kamiyama to head the payments and settlements department, which is at the helm of Japan’s exploration of its CBDC project.

CBDC Project will Help Enhance Japan's "Settlement System," Says Bank of Japan Executive

Head of Payments and Settlement Systems at the Bank of Japan Kazushige Kamiyama has revealed that the country’s proposed central bank digital currency (CBDC) will be used to enhance the country’s “settlement system.”

Kamiyama revealed this during an interview with Reuters and further stated that despite the seeming first-mover advantage China seems to have with its CBDC, no single digital currency will govern the entire world’s payment systems. Kamiyama said:

“I don’t think a single digital currency will dominate the world, as long as each country makes full efforts to improve its settlement system.”

The Bank of Japan (BOJ)’s executive also noted that the institution will continue to watch and learn from other central banks that are developing their own CBDCs. He further elaborated that CBDCs will not alter the Bank’s monetary policies and that the digital currencies deployed will serve to complement the traditional Yen. Per his words:

“We’re looking into CBDCs to enhance our settlement system, not to use it as a tool for monetary policy. That means we need to ensure that issuance of CBDCs does not pose any negative impact on the economy, such as destabilising Japan’s settlement system.”

Japan’s Digital Yen Pursuit Gains Momentum

Having declared that its digital Yen project is one of its top priorities for the rest of the year, the Bank of Japan revealed earlier that it plans to kickstart an early proof-of-concept on the issuance for its central bank digital currency (CBDC) next year.

The BOJ’s initial plan is to use its proposed CBDC to curb the potential influence of China’s much anticipated digital yuan, with the potential help of the United States’ Federal Reserve. As revealed by Kamiyama, the BOJ will focus on boosting the capabilities of the digital yen to meet the country’s inherent settlement system.

Bank of Japan Wants to Hear From Public About Digital Yen Development

Kazushige Kamiyama, the head of the Bank of Japan (BOJ)’s payment and settlement systems department, announced that for the anticipated national digital currency to become a reality, it must be supported by the public.

Kamiyama stated:

“There is no conclusion yet. At the end of the day, there’s no way we can proceed without gaining sufficient understanding from the Japanese public.”

Kamiyama said that for Japan’s Central Bank to launch a Digital Yen, it needs to ensure that that the central bank digital currency (CBDC) can complement physical cash and other types of electronic payments systems. In addition, CBDC also needs to strengthen the transactions ecosystem for commercial banks and other financial companies, without just serving as a tool that the BOJ uses to achieve its monetary policies.

Kamiyama mentioned:

“We have clearly stated that banknotes and digital currency will coexist. The digital currency won’t be useful to deepen negative rates because there will be banknotes to which the rates can’t be applied.”

Japan and China Rushing to Issue CBDCs

The recent announcement by Kamiyama comes at a time when Japanese lawmakers have been pushing the government to launch its own digital yen. The urge for the country to develop its own CBDC comes as a result of China’s digital currency electronic payment (DCEP) development. The news of the potential launch of China’s DCEP has pushed Japan to realize the benefits and significance of a potential central bank digital currency issuance.

The BOJ said that to keep up with technology, it would collaborate with private sectors and the government to further research on digital currency. Japan’s Central Bank aims to modernize and upgrade the financial industry to cope with changing global financial development.

China has been ahead of other major countries in experimenting on a CBDC as it focuses on becoming the first nation to launch a digital currency to reduce its dependence on the world’s main reserve currency (the U.S dollar payment system). Early this month, the People’s Bank of China (PBoC) announced that it has processed more than 3 million transactions worth 1.1 billion yuan ($162 million) as part of its trial DCEP initiative.

While China seems to take the lead towards launching its DCEP, other major economies across the globe are examining the possibility of issuing their own CBDCs.

Japan May Take Several Years To Issue a CBDC says Former BoJ Executive

The Bank of Japan may need several years before it can issue a Central Bank Digital Currency (CBDC), as noted by a former Bank of Japan Executive, Hiromi Yamaoka.

Reuters reported that Yamaoka’s position is based on the need for the Bank of Japan to remove all the hurdles that may surround the country’s digital Yen issuance, including huge outflows from private bank deposits.

The coronavirus pandemic has ignited a new demand to create alternative means for payment involving digital payments and Central Banks around the world, including the Bank of Japan, are positioning themselves to join the train.

Hiromi Yamaoka who previously headed the Bank of Japan’s research on digital currencies stated that a viable way to limit the huge outflows of funds from private banks will require the setting of a limit that every entity can hold per time. In his submissions, Yamaoka also talked about the potentials of CBDCs and private deposits co-existing as imposing limits can result in fluctuations in settlement rates.

He noted that “The fundamental question, and a very tricky one, is how to ensure private deposits and a CBDC co-exist. You don’t want money rushing out of private deposits. On the other hand, there’s no point issuing a CBDC if it isn’t used widely.” However, he believes CBDCs can co-exist with the other elements that make up the financial system.

Digital Yen: Where is the Bank of Japan Currently

The Bank of Japan has shown good movement with respect to the development of its CBDC (Digital Yen) in the past months. The apex bank considers its CBDC project a top priority for which it hired a top economist to oversee the development of the project back in July.

In preparation for the proposed Proof of Concept (PoC) for the Digital Yen in 2021, the Bank launched a public consultation to seeks the public’s take about the project in late October

Over 30 Japanese Firms to Conduct Digital Yen Pilot Test

Over 30 major Japanese companies will collaborate on a pilot experiment to issue a private digital currency, or digital yen. According to Reuters, the pilot project will begin in 2021.

A group of Japanese companies, made up of Japan’s three largest banks, retail companies, utility firms, telecommunication companies, and stock brokerage firms, are set to carry out experiments seeking to issue a digital Yen that would utilize a common settlement platform. The move comes at a time when the Bank of Japan recently made an announcement of its plan to conduct experiments to launch a state-backed digital currency.

On November 19, the group’s organizing body stated that the pilot project is part of Japan’s commitment to promoting the use of cashless payments in one of the most cash-loving nations in the world.

Hiromi Yamaoko, a former BOJ executive who is the chairman of the group said:

“Japan has many digital platforms, none of which are big enough to beat cash payments.”

He further mentioned:

“We don’t want to create another silo-type platform. What we want to do is to create a framework that can make various platforms mutually compatible.”

In Japan, many digital platforms compete and are incompatible with each other. This is a different case in China where digital platforms have dominated cashless payments in the country.

Authorities in Japan have been eager to promote cashless transactions to improve transparency and operational efficiency of public services by eliminating robbery and other cash-related crimes. However, the progress has been quite slow partly because of inconveniences associated with digital payments.

Yamaoko stated that private banks would be responsible for issuing a digital yen in the experiments, although the possibility of other entities tasked with the issuance will also be welcomed.

Japan’s three largest banks – Sumitomo Mitsui Financial Group Inc, Mizuho Financial Group Inc, and Mitsubishi UFJ Financial Group Inc – have each launched their own digital payment. They intend to start working together with tech companies like SoftBank Group unit PayPal in order to fulfil the mission.

Japan’s Quest to Go Cashless

Japan is trying to catch up with peers such as China and Facebook’s Libra stablecoin that have already laid down plans to issue their own digital currencies. The country aims to move fast, not lag behind. This is because if China’s digital currency becomes preferred for transactions in Asia and globally, then Japan may lose economic prestige and opportunities.

Japan is one of the most cash-loving countries in the advanced world. About 65% of payments in the country are settled in cash, more than twice the average 32% among other rich economies. Cashless payments in Japan constitutes only 20% of the total settlement, which is below the US with 45% and China with 70%.

The rapid rise of cashless payments in several nations triggered further interest in CBDC (Central Bank Digital Currencies). Japan bucks the trends to catch up with the rapid global advances in financial technology.

BOJ Governor: Japan Should Prepare "Thoroughly" for the Issuance of its Digital Currency

Haruhiko Kuroda, the Bank of Japan (BOJ) governor, has highlighted the need for the nation’s central bank to prepare “thoroughly” for the rollout of its digital currency with initial experiments expected from next month.

Preparing for changing circumstances

He revealed that experiments with CBDC in Japan will begin in spring 2021. Kerudo acknowledged the need for central banks to stay in line with changing global situations. He explained:

“From the viewpoint of ensuring the stability and efficiency of the overall payment and settlement systems, it’s important to prepare thoroughly to respond to changes in circumstances in an appropriate manner.”

In July last year, the BOJ revealed that the development of its central bank digital currency (CBDC) was a top priority because this would propel a global outreach. It was planning on issuing a proof-of-concept that would guarantee universal access.

The first phase to test distribution and issuance

Japan’s central bank has disclosed that the first experimental phase will test the issuance and distribution of its CBDC. The issuance of CBDCs seems to be a race against time because, in the eyes of many countries, owning a CBDC is instrumental in having control of the global markets.

In October last year, the Bank for International Settlements (BIS), along with seven central banks, released a report identifying the foundational principles necessary for publicly available CBDCs to help central banks meet their public policy objectives. For instance, it was stressed that CBDCs should co-exist with cash and other types of money in a flexible and innovative payment system.

Once rolled out, CBDCs are expected to drive the financial inclusion of nearly 1.7 billion people left out of the banking system. This is because CBDCs are digital assets, which are pegged to a real-world asset and backed by the central banks meaning that they represent a claim against the bank exactly the way banknotes work. Central banks will also be in full control of the supply of CBDCs.

Bank of Japan will test digital yen with three megabanks

Even though Japan is undecided if it would develop a central bank digital currency, the Bank of Japan (BoJ) is continuing to test out a digital version of the yen. This is the case despite the fact that the BoJ is testing out a digital version of the yen (CBDC).

Nikkei, a Japanese news agency, reported on November 23 that the Japanese central bank has begun working with three megabanks and regional banks to conduct a trial CBDC issuance. Nikkei’s report was based on information obtained from the Nikkei news agency. The Nikkei news agency was the source for the aforementioned information.

As part of the pilot program, the digital yen, which will eventually take the place of the paper yen as Japan’s national digital currency starting in the spring of 2023, will be tested. This will be the first time the digital yen will be used.

The Bank of Japan, together with other major private banks and other institutions, will work together as part of the experiment to identify and address any problems that may crop up with the method by which customers deposit and withdraw money from their bank accounts.

According to the story, the pilot will test how Japan’s future CBDC performs when it is not connected to the internet, with a special focus on payments that do not need the internet.

The Bank of Japan’s central bank plans to continue with its CBDC experiment for around two years, and it will make a decision by 2026 on whether or not to develop a digital currency. This information comes from the article.

The declaration comes at a time when an increasing number of countries all over the world are launching research and development activities on CBDC, with countries like China acting as models for the rest of the world to follow in their footsteps.

Despite the fact that the vast majority of governments throughout the world have been working tirelessly to implement a CBDC, some nations, such as Denmark, have made the decision to withdraw from the competition.

As the key reasons for discontinuing their CBDC or CBDC-related efforts, the central banks cited a number of issues as the primary reasons for their decision, including the likelihood of obstacles for the private sector, unknown value and benefits, and other problems.

To this day, there has not been a single central bank that has completely ruled out the possibility of the launch of a CBDC.

Japan to Launch Central Bank Digital Currency Pilot in April 2023

In April of 2023, Japan intends to launch a pilot program for a central bank digital currency (CBDC), even if the country does not permit the use of international stablecoins like Tether (USDT). It intends to include commercial companies and put a model of a CBDC ecosystem through its paces.

The Bank of Japan (BoJ) published Shinichi Uchida’s opening remarks from a CBDC committee meeting on February 17th. Uchida is the executive director of the BoJ. In it, Uchida announces that the Bank has chosen to begin a pilot program for “digital yen” in April after concluding its proof-of-concept testing, which began in 2021. This decision was made after the Bank completed its testing in 2021.

During the pilot test, the investigation into the technological viability of “digital yen” will continue, and the experiment will be expanded to include the modeling of a CBDC ecosystem with the involvement of commercial businesses. According to the official, for the course of the pilot project, there will be no real retail transactions, simply simulations of such transactions.

In his address, Uchida focuses on the design of the future CBDC as well as the need of consulting with the business sector about alternative data models, architectures for offline payments, and other essential components of the system. In order to facilitate discussions of this kind, the CBDC forum will be established.

Since the local media first announced the BoJ’s plan in November 2022, everyone was quite excited to hear the news regarding the CBDC pilot project. The Bank of Japan is reportedly going to work with at least three Japanese megabanks as well as regional banks.

In the meanwhile, the authorities in Japan are contemplating whether or not to repeal the restriction on foreign stablecoins that was passed into law in 2022. The Financial Services Agency of Japan estimates that the revisions will be ratified by the end of June 2023 at the latest. Despite the fact that they won’t automatically allow any foreign stablecoin to enter the market, they will give the all clear to those currencies that are able to successfully pass individual tests.

Japan Accelerates Digital Yen Plans Amidst Global CBDC Race

Japan is actively stepping up its efforts towards issuing a digital yen, a central bank digital currency (CBDC), aligning with global trends in digital currency development. This move signifies a significant shift in Japan’s financial landscape, responding to both domestic needs and international advancements in this arena.

In recent years, the concept of CBDCs has gained momentum globally, with various countries exploring and implementing their versions. Japan, traditionally known for its cash-centric economy, is now making notable strides in this direction. The Bank of Japan (BoJ) and the Japanese government are working collaboratively to address the feasibility and legalities of a digital yen.

Pilot Program and Expert Panel

As reported in early 2023, the BoJ plans to launch a pilot program in April to test the practicalities of a digital yen. This follows the completion of the initial phase of experiments by March 2023. Parallelly, the finance ministry is establishing an expert panel as early as April to discuss and resolve legal issues surrounding CBDC issuance.

Global Context and Comparison

Japan’s move towards a digital currency comes at a time when several countries, including China, the European Union, and the United States, are exploring similar initiatives. China, in particular, is at the forefront of the CBDC race, having already implemented pilot schemes for retail payments. In contrast, Japan aims to ensure the coexistence of CBDCs with various forms of money and to address personal data storage minimization.

Implications for Japan’s Economy

The introduction of a digital yen could revolutionize Japan’s financial system, known for its reliance on cash transactions. It could enhance the efficiency of domestic and international payments, thereby modernizing the financial system. This move also indicates Japan’s recognition of the growing importance of digital currencies in the global economy.

Future Outlook

While the launch of a digital yen is not yet officially confirmed, the pilot program and the formation of the expert panel are critical steps towards this goal. The BoJ has indicated that any decision to issue a CBDC will only be taken after comprehensive national discussions, expected to continue at least until 2026.

Japan’s cautious yet progressive approach towards a digital yen reflects its desire to stay competitive in the evolving global financial landscape while addressing domestic preferences and legal considerations.