Japan Prepares for Digital Yen Launch with Legal Amendments

Japan is moving closer to launching its own central bank digital currency (CBDC), the digital yen, as the government and the central bank are working on the necessary legal changes. The digital yen project has gained momentum in recent months, partly due to the rapid progress of China’s CBDC, the digital yuan.

Japan’s CBDC Design and Timeline

The Japanese government and the Bank of Japan (BoJ) held their first meeting on the CBDC’s system design this month, according to NHK. They discussed the future challenges and legal issues related to the introduction of the digital yen. The government aims to build the legal framework for the CBDC well in advance, to avoid any obstacles or delays in the implementation.

The legal amendments will assume the introduction of the digital yen and will cover changes to the Bank of Japan Act, the Criminal Code, and the Civil Code. The government and the BoJ hope to finalize the list of necessary legal changes by spring this year.

The BoJ has not yet officially committed to launching the CBDC, but it has accelerated its research and development efforts. The central bank announced in October last year that it will start experimenting with the digital yen to check its feasibility from a technical perspective. The experiments will involve three phases: proof of concept, pilot testing, and implementation.

The BoJ expects to start the proof of concept phase in April this year and to complete it by March 2023. The pilot testing phase will involve the participation of private businesses and financial institutions, and will test the functionality and interoperability of the CBDC. The implementation phase will involve the actual issuance and distribution of the digital yen to the public.

The BoJ has not set a specific timeline for the pilot testing and implementation phases, as they will depend on the results of the previous phases and the public demand for the CBDC. However, some sources suggest that the BoJ aims to launch the digital yen by 2025, ahead of the Beijing Winter Olympics.

Japan’s CBDC Structure and Features

The BoJ has proposed a two-tier structure for the CBDC, where the central bank will issue the digital yen and the commercial banks will act as intermediary institutions that will distribute it to the users. The BoJ will also consider ways of allowing other private businesses to participate in the CBDC project, while ensuring fair competition and innovation.

The BoJ has stated that the digital yen will coexist with cash and other payment methods, and will not replace them. The CBDC will aim to enhance the convenience and efficiency of payments, as well as to ensure financial stability and inclusion. The BoJ will also explore the possibility of cross-border payments with the digital yen, in collaboration with other central banks.

The BoJ has not yet decided on the specific features and design of the digital yen, such as whether it will be account-based or token-based, whether it will use blockchain technology or not, and whether it will offer offline payments or not. The BoJ will consult with various stakeholders and conduct extensive experiments to determine the optimal design of the CBDC.

The BoJ has also not yet clarified how the digital yen will affect the monetary policy and the banking system of Japan. Some experts have raised concerns that the CBDC could undermine the profitability and intermediation function of the commercial banks, as well as the transmission mechanism of the monetary policy. The BoJ will need to address these issues and ensure that the CBDC will not have negative impacts on the economy.

Japan’s CBDC Motivation and Challenges

Japan has been lagging behind other major economies in the development of its CBDC, partly due to the low demand for digital payments and the high reliance on cash in the country. However, Japan has been feeling the pressure to catch up with the global trend of CBDCs, especially from China, which has been leading the race with its digital yuan project.

China has been testing its digital yuan in several cities and provinces since last year, and plans to expand its trials to more regions and scenarios this year. China has also been exploring the international use of its CBDC, and has partnered with Hong Kong, Thailand, and the United Arab Emirates to conduct a cross-border payment pilot.

Japan sees China’s CBDC as a potential threat to its national security and sovereignty, as well as to the global dominance of the US dollar. Japan fears that China could use its digital yuan to bypass the US sanctions and to influence the trade and financial flows in the region. Japan also worries that China could gain access to the data and information of the users of its CBDC, and use it for political or military purposes.

Japan has been collaborating with other countries to counter China’s CBDC ambitions and to promote a common vision and standard for the CBDCs. Japan has joined the CBDC research group formed by the central banks of Canada, the UK, the EU, Sweden, and Switzerland, as well as the Bank for International Settlements (BIS). Japan has also partnered with the US and India to develop a digital payment network that will rival China’s.

Japan faces several challenges in the development and implementation of its CBDC, such as the technical complexity, the legal uncertainty, the social acceptance, and the international coordination. Japan will need to overcome these challenges and balance the trade-offs between the benefits and risks of the CBDC. Japan will also need to ensure that its CBDC will be compatible and interoperable with other CBDCs and payment systems.

Japan is preparing for the digital yen launch with legal amendments, as it aims to catch up with the global trend of CBDCs and to counter China’s digital yuan. The digital yen project has gained momentum in recent months, as the government and the central bank are working on the system design and the pilot testing of the CBDC. The digital yen will aim to enhance the convenience and efficiency of payments, as well as to ensure financial stability and inclusion.