Japan Uneased by Chinese CBDC, plans for digital yen in "2 to 3" years

10 min read

China continues to advance in the central bank's digital currency race, as more details about its mysterious digital yuan project appear intermittently. As a result, more countries are starting to worry about the possible implications.

In recent weeks, a number of Japanese lawmakers have publicly expressed their preference for a CBDC controlled by the Bank of Japan. The general idea is to counter the upcoming digital yuan from neighboring China and to prevent it from disrupting the global economy.

According to a leading legislator of a ruling party, the development of a Japanese CBDC can take two to three years & # 39; last. Will it be too late to serve as a challenge for Beijing? What does a currency issued by BoJ look like?

Bank of Japan versus CBDC: a preference for cash

The Bank of Japan's relationship with CBDC & # 39; s can be traced back to April 2018, when Deputy Governor Masayoshi Amamiya first addressed the subject publicly. Although the tone of his comment was predominantly negative, the official did not exclude the possibility of considering the bank's own cryptocurrency.

In particular, Amamiya argued that the issuance of a general purpose CBDC would undermine the existing financial system as it would allow consumers to open accounts directly with the central bank and therefore leave private banks completely and give them a major disadvantage :

“The issuance of digital currencies from central banks for general use can be similar to allowing households and businesses to have accounts directly with the central bank. This can have a major impact on the aforementioned dual currency system and the financial intermediation of private banks. "

The representative of the central bank concluded that although his agency was not considering issuing his own virtual currency, it realized that the use of emerging technologies was a possibility.

Half a year later, in October 2018, Amamiya repeated his predominantly negative attitude toward CBDC's. He claimed that such digital currencies are unlikely to improve existing monetary systems, and adds that the central bank does not intend to issue a CBDC that can be widely used by the public for settlement and payment purposes.

During his speech, Amamiya attempted to use the idea of ​​CBDC & # 39; s as a tool for central banks to control the economy as soon as interest rates fall to zero. According to this theory, a state-controlled digital currency can allow central banks to charge more interest on deposits from individuals and companies, which in turn would result in them spending more money, thereby stimulating the economy. Japan was one of the first countries to introduce negative interest rates in 2016 together with the European Central Bank.

BoJ's deputy governor therefore claimed that charging interest on CBDC's would only work if central banks were to remove fiat money from the financial system, which is not an option for Japan, where cash is still a popular payment method is. Otherwise, the public will continue to convert digital currency & # 39; s into cash to prevent interest from being paid. Amamiya added: "In order for central banks to overcome the zero limit for nominal interest rates, they should get rid of society."

In February 2019, the Bank of Japan published an extensive report on CBDC's. The document, written by a BoJ official and a professor from the University of Tokyo, investigated various ways to implement a CBDC and the hypothetical consequences of those approaches. The report focused specifically on two types of CBDC & # 39; s previously categorized by the Bank for international payments: one that is accessible to the general public for daily transactions (such as bank notes) and the other for large settlements (central bank deposit & # 39; s)) single and only.

Following the concerns of Amamiya, the paper's authors argued that CBDC & # 39; s of the latter type would not improve the current monetary system, and focused primarily on the first type in their analysis. The report also noted that blockchain could be used for a token-based CBDC.

Finally, in July 2019, Amamiya again stated that countries that issue CBDCs with negative interest rates would force the public to pay cash, while eliminating physical money is not an option.

Chinese threat: new interest in CBDC & # 39; s among Japanese politicians

In 2020, a year that has already been remarkably eventful in terms of global acceptance of cryptos, Japanese lawmakers returned to the idea of ​​a CBDC. The wave of renewed interest was started by a parliamentary group consisting of about 70 members of the ruling Liberal Democratic Party who are concerned about the rapid development of the digital yuan in neighboring China.

Earlier in January, the People & # 39; s Bank of China reportedly completed the top layer design and joint testing of its forthcoming CBDC. The idea that China could force other countries to digitize their currencies has been widely discussed since Libra's announcement in the summer of 2019 apparently prompted Beijing to accelerate the development of its digital yuan. A common theory is that China can quickly launch its CBDC through its "Belt and Road" initiative, which it maintains trade relations with a number of friendly developing economies.

Norihiro Nakayama, parliamentary vice minister of foreign affairs and an important member of the Japanese Liberal Democratic Party, said on January 24: "China is moving towards the issue of digital yuan, so we want to propose measures to counter such attempts, "

On January 30, the Amamiya of the Bank of Japan continued the discussion by stating that the central bank should be ready to issue a CBDC if public demand increases due to rapid technical developments.

Amamiya has not withdrawn its previous claims about such digital currencies because it emphasized that the issuance of CBDC's would not have a major impact on the effectiveness of monetary policy and its effect on interest rates, asset prices and bank loans . However, the BoJ officer focused on technical innovations within settlement systems that entail CBDC & # 39; s: "The transmission mechanism (…) can become more complicated and difficult (to break down) if settlement systems change."

Amamiya clarified that the institution still has no plans to issue a digital currency because it continues to assess the potentially overlooked implications for monetary policy and security issues. It is "very important" for BoJ to continue to study the possibility of issuing CBDC's, he added.

On February 7, Akira Amari, former Economy Minister and member of the ruling Liberal Democratic Party – led a group of legislators who urged their government to insist that digital currencies be placed on the G-7 agenda this year. . The 2020 G-7 summit takes place from 10 June to 12 June in Camp David, Washington. In particular, Amari and his allies have specified the source of their concern – the Chinese CBDC:

“We live in a stable world led by dollar settlement. How should we respond if such a foundation collapses and (China & # 39; s move) gives rise to a struggle for the supremacy of currencies? "

Three days later, on February 10, another Japanese legislator stepped forward to support the idea of ​​a digital currency issued by BoJ. The head of the Liberal Democratic Party's banking and financial system inquiry committee, Kozo Yamamoto, said Japan should create a digital yen currency, hopefully "within two to three years".

Is Japan too late for the party? Experts don't think so

Jeff Wentworth, co-founder of the Tokyo-based blockchain-tooling startup Curvegrid, believes that the issuance of a digital yen would be a logical step for the local central bank. He told Cointelegraph that: "Every economy needs a CBDC, just like almost every economy made the switch from paper money to electronic banking in the 1980s." However, according to Wentworth, Amari can overestimate the influence of a CBDC issued in China, as the performance is likely to depend on the design of the currency:

"CBDC & # 39; s in general will disrupt the current status quo, but it is hard to say what impact the digital yuan will have in particular on the global currency balance. An important consideration is how decentralized the yuan and other CBDC's will be. If they remain centralized most of the time, the CBDC's will be in name only and not much different from the current state of electronic money. More change is likely to be caused by CBDC's that use a more decentralized approach. "

Maurizio Raffone, chief financial officer of blockchain company Credify, also based in Tokyo, shared a similar sentiment and claimed that the digital yuan might not dethrone the US dollar in the near future:

"At least in the coming years I don't see a digital Yuan replacing the USD. China should remove currency controls on the Yuan (because it would be linked to the digital Yuan), which would imply some loss of control over monetary policy , something the Chinese government just won't do. "

Raffone added, however, that the BoJ is too late for a CBDC because loose monetary policy is running out and that a CBDC can be a great way to improve monetary speed in the Japanese economy and stimulate GDP growth. "He added that Japan should take technical and financial considerations into account, explaining the following:

“Technically speaking, the CBDC of Japan would be an excellent tent for digital transformation and innovation for all Japanese financial service providers and a way for them to track the digital currency of the Bank of Japan to stimulate their own product development. Financially, a CBDC can be a huge saving for banks, but also an effective tool to protect against tax evasion and money laundering. "

Both experts agree that although the People's Bank of China is considered the leader in the CBDC race, it is not too late for the Japanese central bank to start its own digital currency project, as two to Three years in the global financial market is still fairly fast.

As for the United States, his officials acknowledge that the prospect of the digital yuan may threaten the dominance of the USD, but would rather stay on the sidelines for the time being. Earlier this week, Congressman Bill Foster interviewed a Federal Reserve official about this and was told that the institution is not yet certain whether the use of such a digital currency would benefit the US economy.

Meanwhile, China continues to complete its CBDC project and to leave other countries behind. On February 12, the Financial Times reported that the Chinese central bank has filed more than 80 patents regarding its undisclosed plans to launch the digital yuan and how it integrates with the banking system.

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Don Bradman

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