Despite launching CBDC research, Bank of Japan is still not sure nation needs digital yen. Experts fear the caution could cost Japan its competitive edge.
Will Japan, or won’t Japan when it comes to CBDCs?
This month, the Bank of Japan began experiments to test the technical feasibility of a central bank digital currency, with the phase 1 of the project expected to last one year.
But the central bank has also cautioned that this is a just-in-case project with no timeline for implementation or launch. In fact, the Bank of Japan has repeatedly stated that it does not see an actual need for Japan to issue a CBDC — an uncertain prospect that is leaving some quarters in Japan feeling impatient.
Japan needs to hurry up with its study on central bank digital currencies to build up expertise and get ready for the future digital economy so that the country will not fall behind other nations, several experts told Forkast.News.
“The biggest benefit to introduce CBDC in Japan is to speed up the efforts to shift to a cashless society,” said Takahide Kiuchi, the executive economist with Nomura Research Institute. “Digitalization is inevitable for today’s business, economy and society to increase efficiency, and demand for the currency and payment system tailored for the digitalized world will only grow.”
“Central banks ensure the credibility of currency. This credibility is crucial in financial systems,” Kiuchi added. “A CBDC mobile payment and settlement system will provide general public with higher level of reliability, and can advance transformation of the society that’s lagging behind the other advanced economies.”
Hajime Tomura, professor of political science and economics at Waseda University in Tokyo, said a CBDC payment and settlement system would be more user-friendly to Japanese consumers and retailers.
“The fees to use the system can be much lower as BOJ’s job is not to pursue profitability,” Tomura said.
Political circles in Japan are also keen for CBDC issuance, although their concern is on the viability of and economic security of the Japanese yen on the international stage.
“The government and the ruling Liberal Democratic Party (LDP) are alerted that Japan will lag behind China,” Hiromi Yamaoka, the chairperson of the Digital Currency Forum, told Forkast.News.
China is already into its seventh year of digital currency development. Though it has not yet officially launched, its “Digital Currency, Electronic Payment” (DCEP) project’s digital yuan has already been released in successive rounds for testing by large banks, retailers and consumers for nearly a year now. Aside from allowing China to tighten the control over its money supply and better monitor domestic financial activities, the e-CNY — as the digital yuan is now officially called — could also allow China to better compete against other currencies, including the U.S. dollar and the Japanese yen, in international trade and finance.
“The world’s second largest economy is to contest U.S. currency and financial hegemony,” Yamaoka said. “Competitiveness of the yen could be lost in future.”
China’s progress in a digital currency should be a warning bell to neighboring Japan if Japan wants to maintain its competitive edge, others warn.
“The ‘indirect CBDC’ model — CBDC to be issued indirectly through intermediaries — looks desirable,” said Tomura, of Waseda University. “In the event of system failures or natural disasters, BOJ won’t be able to make discretionary compensation of damages to general public by public money.”
Bank of Japan also says it’s “appropriate to maintain a two-tiered payment and settlement system of a central bank and the private sector” — but in an abundance of caution perhaps reflective of Japan’s culture of reserve, won’t say one way or another whether this is what Japan should or would do.
Experts also suggest that the Bank of Japan help improve the usability of existing digital payment systems provided by the private sector. “One option would be for the central bank to ensure and monitor the security and credibility of private payment systems currently provided by major commercial players,” says NRI’s Kiuchi. Even the industry leaders, such as LINE Pay, PayPay and Rakuten Pay, are not universally accepted by retailers nationwide. Risks also include the system providers to withdraw the service or the worst to go bankrupt.
It’s not clear how much the Japanese public sees a need for a CBDC.
As a nation, Japan is a very cash-oriented nation, and its banking system works well for the vast majoirty. Just about everyone — 97% of population over 15 years of age — has a bank account. ATMs are plentiful and located in practically every corner of cities. Japan’s “convenience” around cash in fact is provided by the Bank of Japan and commercial banks, but it comes at a cost.
The Japan Bankers Association estimates the total housekeeping cost of ATM machines, including cash transportation, armored vehicles and security guards, is as much as 8 trillion yen, or about US$73.5 billion — a cost that is indirectly borne by Japanese taxpayers.
“This is not a negligible subject when you think of the cost that Japan’s economy bears and impact on the profitability of commercial banks,” says ex-BOJ executive Yamaoka.
From the perspective of anti-money laundering and combating the financing of terrorism, experts say the advantages of digital currency over cash is a no-brainer. While a government-issued digital money can be programmed to be traceable, cash offers a great degree of anonymity and leaves room for criminal acts such as tax evasion. The total amount of cash that people choose to stash at home in Japan, away from authorities’ prying eyes, is said to be as much as 100 trillion yen. The cash stash is non-taxable, if it is not transferred to others for the purpose of inheritance or gift.
But issuing a Japanese CBDC would also be fraught with challenges. One hurdle is purely legal. The Bank of Japan Act, which regulates the yen, is currently not written with the digital world in mind. The law currently states that only physical banknotes and coins issued by the central bank have tangible value, and they are the only legal tender currency in Japan. The law would need to be revised to include digital currencies as a “legal currency,” according to the bank and therefore it is “difficult to assume that ‘currency’ should include intangible CBDC.”
Bank of Japan has indicated that it might one day provide CBDC as a payment instrument alongside cash, should the cash in circulation drop significantly and should private digital payment systems be unable to substitute for the functions of cash sufficiently, although “it is unlikely to happen.”
Ultimately, it would be Japan’s government, not its central bank, to decide whether to issue a digital yen. Growing debate on CBDC within the government and by the public could eventually put more pressure on Japan to develop one — whenever that might be.