Today the Nikkei reported that the Bank of Japan (BoJ) is coordinating with the country’s three largest banks, MUFG, SMBC and Mizuho to participate in retail central bank digital currency (CBDC) experiments. Regional banks and fintechs will also be involved in the digital yen trials, which will start in the Spring of 2023.
Based on our knowledge of the central bank’s roadmap, we believe this is still part of the second phase of Proofs of Concept (PoC). Phase 2 started in April 2022 and was expected to continue for at least a year. One of the topics is coordination with intermediaries.
The Bank of Japan has not yet made a decision to proceed with a CBDC. There’s expected to be a pilot for two years or more, with a decision around 2026. It has previously been stated that there needs to be a national consensus to proceed interpreted as a referendum.
Experiments with intermediaries will focus on moving money between bank accounts and digital currency, and it will also include offline experiments. Fintechs will get involved in security and identity verification, and the central bank expects private firms to second staff to the BoJ.
It’s likely that the CBDC will be account based. In the first phase of PoC research, the central bank experimented with account-based and token- based CBDC and wasn’t happy with the latter’s performance.
In the current second PoC phase, apart from interacting with intermediaries, the topic areas are improving the convenience of payments and economic designs. For example, the BoJ is looking into limiting CBDC holdings, controlling transaction amounts, and considering whether a CBDC should be interest-bearing.
Japan was one of the earlier CBDC explorers, with several rounds of research before Facebook unveiled Libra. In October 2020, it was one of seven central banks to publish a joint paper with the BIS on digital currency. Also in 2020, the Bank of Japan published a report on using CBDC offline.