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Japan announced its plans to begin the CBDC pilot program in November 2022, which will launch sometime in 2023 and run for two years from the date of launch. During this period, the Bank of Japan (BOJ), with other banks and regional financial institutions, will conduct the pilot.
It will test deposits and withdrawals from accounts and the feasibility of the currency in an emergency when there is no access to the internet. Whether the country adopts the CBDC, digital Yen, in 2026 will depend on the results of this trial.
This program that BOJ has currently taken up is an end-stage trial. The first or initial stage trials were held last year to test the primary functions, including issuance and circulation. It was an internal trial, while the current one examines the currency's real-world usage feasibility.
Japan wants its CBDC to offer universal access and not avoid any individual, device, or card. It also wants its CBDC to have counterfeit deterrence technology and prevention mechanisms to stop it from being used in illicit activities.
The CBDC should be available 24/7/365 to all users and offer cash-like settlement finality or instant payment capabilities. To ensure the same for many users simultaneously, the Japanese CBDC must have sufficient processing capabilities and scalability.
Finally, for it to be a meaningful financial tool, the CBDC has to have comprehensive interoperability features and compatibility with other payment and settlement systems.
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Japan would have two main CBDC variants: i)Wholesale CBDC and ii)General Purpose CBDC.
While Japan has no intention to impose any sort of restrictions on its cash supply, there might come a time when the volume of cash in circulation will drop. In such a case, the Central Bank of Japan thinks general-purpose CBDCs could become a useful payment instrument alongside cash.
Moreover, irrespective of the levels of cash in circulation and the public’s demand, Japan wants its CBDCs to improve the stability and efficiency of the overall payment and settlement systems.
Japan is cautious about maintaining a balance of its CBDC policy in line with its overall monetary policy. It is careful about designing its CBDC schemes, such as applying limits on the amount of issuance/holdings and remuneration.
The country wants its banks to carefully decide on the role-sharing arrangement with the payment service providers or PSPs. It believes the data handling part requires in-depth scrutiny, including who obtains and manages what data and under what conditions.
One of the crucial aspects that Japan’s CBDC is expected to play is cross-border payments. Monitoring is essential to maintain a seamless and secure flow of international and domestic transactions.
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Cryptocurrencies are pretty popular in Japan, and data from 2021 suggest there are more than three million active crypto asset accounts on crypto exchanges in the country. In 2021, the trading value of crypto assets in Japan was close to 66 trillion Japanese Yen. The crypto spot market recorded a transaction value of more than 28 trillion Japanese Yen, while margin trading crossed the 37 trillion Japanese Yen mark.
Japan has also been an active proponent of Web3. In fact, its promotion is a part of Japan’s national strategy. A small active group of politicians is ensuring guidelines for DAOs, NFTs, and everything related to cryptocurrencies. A focused approach toward the market has also helped the country list new currencies easily and conveniently.
Whether the Central Bank Digital Currency, the digital Yen, would also become a success that we would get to know by 2026.
