Central Bank Digital Currencies (CBDCs) have essentially become the latest buzzword in the global financial space. Countries worldwide are chomping at the bit to digitize their currencies and finally move beyond the constraints of digital cash.
Today, no less than five leading economies have decided to issue CBDCs. This is besides the European Central Bank (ECB), which is now working on a digital currency that will encompass the entire European Union. However, while many countries have registered their intent towards launching a CBDC, only a few have moved from intent to action. Japan is one such country, and it is moving rather quickly.
The Goal of Stifling China
Japan’s primary motive for issuing a CBDC – which many have dubbed the digital yen – is to curtail its neighbor China’s influence (its neighbor), and the other country that has made considerable progress with a CBDC. The Japanese government understands that China has a greater technological prowess and a more robust economy. If the country can develop a CBDC that may become the global standard, it could nearly drown out other countries. Being a neighbor, the Japanese yen will be the first to go.
Today, China has made significant progress with its digital yuan. There are even ATMs that dispense the asset now and allow easy conversions. The ubiquity of the asset has been a concern for many ever since last year. However, Japan was one of the first countries to raise the alarm over what China was doing and its meaning for the global economy.
Last year, the Japanese first published a draft of its digital yen and registered its intent to pursue a CBDC. At the time, Norihiro Nakayama, the Vice-Minister for Foreign Affairs, asked that the United States Federal Reserve immediately join a consortium of banks looking to study CBDCs and their impacts.
The coalition itself had included central banks from Canada, Japan, Switzerland, the United Kingdom, Sweden, and the European Union. As Nakayama explained at the time, the Chinese digital yuan could essentially overrun the dollar and break down the latter’s reign and status as the global reserve currency. To prevent that, the Fed will need to step in and join other banks in launching CBDCS.
“We sense the digital yuan is a challenge to the existing global reserve currency system and currency hegemony. Without the U.S., we cannot counter China’s efforts to challenge the existing reserve currency and international settlement system,” said Nakayama, according to a Bloomberg report.
Since then, the Federal Reserve has shown little to no proclivity for launching a CBDC. Despite several other counties – including almost every nation on that consortium of central banks – committing to a digitized currency at some point. Japan essentially saw that it couldn’t rely on the United States to help, and it immediately set out to launch its digital asset.
In October, the Bank of Japan issued a report with the Bank of International Settlements (BIS), confirming that it would begin tests for a CBDC proof of concept in 2021. According to the report, work on the project will include developing a test environment and building parameters that would determine whether the digital yen can indeed operate as a functional proof of payment.
The Bank of Japan mainly had offline payments in mind. The report noted that Japan is indeed prone to natural disasters and more that could easily knock out internet access for days. With these tests, it is looking to build a digital yen that can work without internet infrastructure and still facilitate transactions efficiently.
Time to Work
Additional information has since come out about the digital yen and tests that will work with it. In November, Reuters reported that the Bank of Japan had picked the country’s largest banks as part of a consortium of 30 private institutions that would play roles in testing the digital yen.
The report explained that the entire group included brokerage firms, banks, telecom firms, utility companies, and even retail giants. For installation purposes, banks will be responsible for currency issuance. Hiromi Yamaoka, a former executive at the Bank of Japan, will head the group of institutions.
Speaking about their objectives for the test, Yamaoka explained: “Japan has many digital platforms, none of which are big enough to beat cash payments. [...] What we want to do is to create a framework that can make various platforms mutually compatible.”
A Conservative Approach
For now, it is unclear whether Japan’s goal of holding China off will actually work. For one, it’s worth noting that China is miles ahead of Japan in CBDC testing. While China is already in the advanced testing stages, Japan hasn’t really done anything substantial.
Yamaoka himself told Reuters in November that it would take the country years to develop its CBDC. As he explained, the Bank of Japan is worried about its CBDC triggering a massive run on banks. So, it is looking to take things slowly.
Still, country officials are also optimistic about their ability to prevent the digital yuan from overrunning the world. Kenji Okamura, vice-finance minister for Japan’s international affairs, said at a meeting in October that China could eventually lose out with its first-moves stance, and that no single CBDC will dominate the world.
Okamura’s stance remains that China could induce several mistakes in its mission to be first. If that happens, the country will provide a blueprint for others to follow in their efforts. Thus, Japan – and other countries – will be able to issue better digital assets that address real issues.