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Japanese Lawmaker Urges Digital Yen Development to Curb China Dominance

Japanese Lawmaker, Kozo Yamamoto has called for the expedited development of Japan’s digital yen as the race to be the first nation with an operating central bank digital currency (CBDC) heats up.

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” according to a report publishedon Feb. 10 by Reuters.

Race for Digital Currency Dominance

The race for digital currency dominance began last year following Facebook’s push to launch its own cryptocurrency, now re-imagined as a stablecoin – Libra. With over two billion registered Facebook users, Central Banks across the world sat up and took notice and began to raise questions on whether nations will maintain financial control in the future.China’s state-owned bank, the People’s Bank of China (PBoC) has been reportedly charging full speed with its development plans in response to Facebook’s Libra.

According to Reuters, Yamamoto’s desire in the expediency of Japan’s CBDC development is to counter China’s own digital yuan development. He explained could spread quickly through the Belt and Road Initiative, and advance China’s digital hegemony. He said that plans for Japan’s CBDC should be included in the government’s mid-year policy guidelines – plans currently being drafted by his department.

Japan Calls on FED to Aid Six Bank CBDC Research

Aiming to curb the potential influence of China’s digital currency electronic payment, its nation’s central bank digital currency, Japan is looking to release its own digital currency proposals. According to Prime Minister Shinzo Abe, the country is also requesting support from the US Federal Reserve.

Norihiro Nakayama, the Vice-Minister for Foreign Affairs in Japan and the top member of the Liberal Democratic Party, the ruling party that drafted the proposals, said that he wishes the “Federal Reserve would partner with the six other central banks including the Bank of Japan in studying digital currencies.”

As the US Dollar remains the world’s dominant currency, 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.”

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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.

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.

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Bank of Japan Testing Digital Yen CBDC

The Bank of Japan (BoJ) has just announced that it will begin experimenting with a Digital Yen, its own Central Bank Digital Currency (CBDC) to test its technical application and feasibility.

Although no timetable for Japan’s CBDC experimentation has been revealed, this is the first announcement by the BoJ that it will commence a Proof of Concept (PoC) process with the Digital Yen.

The BoJ published a report called Technical Hurdles for CBDC, in which the bank disclosed that it would check the feasibility of CBDC from a technical perspective while continuing to collaborate with other central banks that are also in development.

Two Technical Issues Identified

According to the report, the BoJ identified two major technical issues to overcome with its CBDC—universal access and resilience.

One is universal access, which as the name implies is to grant access to everyone including those who do not use smartphones. Surprisingly, in a country known for cutting edge tech, Japan’s smartphone penetration sits only at around 75% today, according to the Communications and Information Network Association of Japan.

The second issue referred to in the BoJ report is called “Resilience”—referring to accessibility to the Digital Yen offline in the event of a power outage or natural disaster.

Will the Digital Yen use Blockchain?

The report highlights the BoJ’s considerations of incorporating blockchain technology in its CBDC plans. The paper states that a centralized system that does not include DLT has larger capacities and are generally much faster as the transactions do not need consensus—but this opens up the entire system to a single point of failure which can be attacked or could disrupt the entire system if it goes down.

On the flip-side, a blockchain-based CBDC will be immune to a single point of failure and be capable of “resilience” but is generally slower as consensus must be achieved across the decentralized network.

Curbing China’s DCEP

Bank of Japan (BoJ), the nation’s central bank is aiming to create a digitized Yen to curb the potential influence of China’s own CBDC development—the Digital Yuan or Digital Currency Electronic Payment (DCEP). There have been many reports that China is already actively testing its DCEP across a range of civilians, government employees, and even some global organizations within the mainland.

In February, six central banks around the world came together to create a working group to share experiences on use cases on central bank digital currency (CBDC). With significant expertise in exploring digital currencies, these six central banks are the 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 for International Settlements (BIS).

It was reported that Japan has also requested support from the US Federal Reserve to get in front of China. Norihiro Nakayama, the Vice-Minister for Foreign Affairs in Japan was quoted saying that he wishes the “Federal Reserve would partner with six other central banks including the Bank of Japan in studying digital currencies.”

Bank of Japan Puts Top Economist in Charge of CBDC Development

Bank of Japan’s top economist, Kazushige Kamiyama is now the head of payments and settlements and at the helm of Japan’s exploration of its Central Bank Digital Currency (CBDC) project.

The Bank of Japan announced today, July 31, that it has appointed its lead economist, Kazushige Kamiyama to lead its payments and settlements department which is currently heading up CBDC exploration for the central bank.

Seisaku Kameda will succeed Kamiyama as the Bank of Japan’s top economist and head of its statistics department.

The Race for CBDC Control

The announcement of Facebook’s Libra has been the catalyst for central bank digital currency exploration the world over. While Bitcoin has suffered in terms of rates of adoption, the idea that a non-sovereign currency might be issued by an entity with over 2 billion users, has galvanized the world’s central banks into creating their own version of digital currency.

In particular, China launched full steam ahead into its own central bank currency to ensure Libra would be crushed—if it was ever able to pass the regulatory hurdles being thrown at it by every authority on the planet. The US has been much slower off the mark and is still discussing its own digital dollar, while China is now in the testing phase.

The realization that a CBDC may be the key to taking further control of the global markets, has further accelerated Japan’s venture into the space and the Bank of Japan has been experimenting along with six other central banks in the hopes to curb China’s growing influence.

Japan Accelerates Towards CBDC

As recently reported by Blockchain.News, the Japanese Government has continued its acceleration towards a Central Bank Digital Currency (CBDC) and it has included it as a consideration in its formal economic plan.

The news of the inclusion of Central Bank Digital Currency in the official Honebuto Economic Plan came just one week after the Bank of Japan (BoJ) announced it will commence a Proof of Concept (PoC) project with the Digital Yen.

Although no timetable for Japan’s CBDC experimentation has been revealed, the BoJ published a report called Technical Hurdles for CBDC, in which the bank disclosed that it would check the feasibility of CBDC from a technical perspective while continuing to collaborate with other central banks that are also in development.

Ultimately it will be the Japanese government, however, and not the Bank of Japan, that will have the final say on whether or not to issue CBDC.

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.

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 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.