The Bank outlined three potential motivations for a CBDC. Retail payments in Japan are still dominated by cash. But if that situation were to change, the Bank might need to provide a CBDC as an option. Another reason would be if it was required to improve payment and settlement systems’ stability and efficiency. On this point, there are several private Japanese initiatives, particularly from banks looking to offer digital yen.
And the third CBDC driver is the potential need for a digital yen to support a digital society. For now, there’s quite a push by Japanese institutions to use blockchain and a wholesale CBDC would be useful for on-chain settlement.
Not mentioned were concerns that China’s digital yuan could creep into Japanese society. Nine months ago, Norihiro Nakayama, Japan’s deputy minister of foreign affairs, said, “China is moving toward issuing digital yuan, so we’d like to propose measures to counter such attempts.”
The digital yen report also outlined key features that would be expected from a CBDC. The first is universal access, so not just via mobile phones but also using cards. Next is security to prevent counterfeits and resilience in terms of 24/7 and the ability to use it offline in case of disasters. A digital yen would need to enable instant payments and be interoperable with other payment and settlement systems.
In terms of next steps, the BoJ plans three sets of tests, including two proofs of concept (PoC). If the BoJ wants to take things further, there will be a third pilot phase. The PoC phase 1 will start before March.
The report follows a working group on CBDC set up by the Bank three months ago.
Like many other central banks, the BoJ wants to ensure international cooperation. It previously conducted several tests as part of Project Stella with the European Central Bank (ECB). The ECB, BoJ, Bank for International Settlements (BIS) and five other central banks also published a report on CBDC today following the release of the ECB’s report on the digital euro last week.