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Japan is one of the leading countries in exploring the potential of central bank digital currency (CBDC), the digital version of the national currency. The Japanese government and the Bank of Japan (BoJ) have recently held their first meeting to discuss the system design and legal issues of issuing a digital yen. The aim is to create a stable and efficient payment and settlement system for the digital society.

Why Japan Needs a CBDC

Japan has a reputation as a cash-based society, but the use of cash has been declining in recent years due to the popularity of electronic payment methods. The COVID-19 pandemic has also accelerated the shift to digital payments, as people avoid physical contact and seek convenience and safety.

However, the current payment system has some drawbacks, such as high costs, low speed, and limited interoperability. Moreover, Japan faces the challenge of competing with other countries, especially China, that are advancing their CBDC projects rapidly. China has already launched pilot tests of its digital yuan in several cities and plans to use it for the 2022 Winter Olympics.

Therefore, Japan needs a CBDC to enhance the stability and efficiency of its payment and settlement system, as well as to maintain its influence and sovereignty in the global financial arena. A CBDC could also provide a payment instrument alongside cash, in case the demand for cash drops significantly in the future.

How Japan Plans to Issue a CBDC

The BoJ has not yet officially committed to issuing a CBDC, but it has been conducting research and experiments on the topic since 2016. In October 2020, the BoJ announced its approach to CBDC and its plan to start the first phase of the proof of concept (PoC) in early 2021. The PoC will test the basic functions and technical feasibility of CBDC, such as issuance, distribution, and redemption.

The BoJ intends to adopt a two-tiered system for CBDC, where the central bank issues CBDC to intermediaries, such as commercial banks and payment service providers, and they distribute it to the end users, such as individuals and businesses. This way, the BoJ can leverage the existing infrastructure and expertise of the private sector, while ensuring the safety and reliability of CBDC as a public good.

The BoJ also plans to collaborate with other central banks and international organizations to exchange views and information on CBDC. For example, the BoJ is a member of the CBDC Bridge initiative, which aims to develop a cross-border payment platform using CBDC. The BoJ is also a member of the BIS Innovation Hub, which explores the implications and opportunities of CBDC and other innovations for central banking.

What are the Legal Issues of CBDC

One of the main challenges of issuing a CBDC is to ensure its legal validity and compatibility with the existing laws and regulations. The BoJ and the government have agreed to resolve the legal issues related to CBDC by spring 2024, before making any decision on the official launch of CBDC.

Some of the legal issues that need to be addressed include:

• The definition and status of CBDC as a legal tender and a liability of the BoJ
• The amendment of the Bank of Japan Act, which currently limits the BoJ to issuing banknotes
• The protection of personal data and privacy of CBDC users
• The prevention of money laundering, terrorism financing, and tax evasion using CBDC
• The coordination and cooperation between the BoJ, the government, and the private sector on CBDC
• The compatibility and interoperability of CBDC with other payment methods and systems
• The cross-border use and regulation of CBDC

The BoJ and the government will consult with relevant stakeholders and experts, as well as conduct public hearings and surveys, to gather opinions and feedback on CBDC. The BoJ and the government will also consider the social and economic impacts of CBDC, such as its effects on monetary policy, financial stability, and financial inclusion.

Japan is making steady progress in its CBDC project, with the aim of creating a digital yen that can meet the needs and expectations of the public and the market. The BoJ and the government are working together to design and test the system and legal framework of CBDC, while keeping an eye on the global trends and developments. Japan hopes to be ready to issue a CBDC when the time comes, and to contribute to the innovation and evolution of the payment and settlement system for the digital society.