Japan’s central bank digital currency should go big, not go home

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In Japan, cashless payment instruments have become more common. Japanese citizens are now comfortable with the use of credit cards and the serious labor shortage has accelerated the automation of payments. The cash -free payment ratio for consumption reached nearly 40 percent in 2023, a major improvement of 13 percent in 2010.

But Japan remains one of the world’s few cash -centered economies. The ratio of cash in circulation to the nominal GDP has dropped about 20 percent for many years, much higher than the corresponding rates of 12 percent in India, 9 percent in China, 8 percent in the United States and South Korea and sub -1 percent in Sweden.

Japan ages the fastest rate in the world with about a third of its citizens of 65 years or older. The average real GDP growth has remained long below 1 percent and domestic market size is expected to shrink. This explains why some small stores, clinics and hospitals want to avoid the costs and fees associated with the installation of equipment or the use of digital payment services. Japan’s slow progress in digitizing the economy is clear in the fact that many still use traditional stamps engraved with family names called ‘Hanko’, send faxes and submit their tax on paper.

In some countries, the use of cash is denied in many places, so citizens must get used to electronic money. The transformation of Japan in this way can be politically challenging due to the likelihood of resistance of the only demographic growing in size – senior citizens.

Japan, like many other countries around the world, is nevertheless interested in the possibility of setting up a Central Bank Digital Currency (CBDC). More than a hundred central banks worldwide are investigating the feasibility of CBDCs and some countries, such as Nigeria and the Bahamas, has actually implemented their currencies. Many of the central banks that are particularly interested in issuing CDBCs are located in emerging economies, where not all citizens have a bank account due to lack of branches and ATMs in remote areas. Since most people have cell phones, promote the promotion of electronic payments and the use of safe digital currencies the population.

One exception to this trend is the European Central Bank, which has actively investigated a ‘digital euro’ CBDC. The digital euro can further deepen the currency union and generate greater efficiency by introducing a digital payment option accessible to everyone in the entire euro area.

But Japan does not offer such network effects, given the falling population. The Bank of Japan (BOJ) emphasized that it has no plans to issue a CBDC, but investigates how it can be implemented quickly if a future government decides to issue one. But even if a CBDC is issued, many citizens are likely to adhere to cash or digital payments offered by banks in the private sector and payment service providers. Considering the cost of designing a retail -ready CBDC which is resilient at various illegal uses and cyber attacks, the benefit of a CBDC for the general public is likely to be low in Japan.

Instead, the BOJ should consider issuing CBDCs to reduce border transaction costs. Currently, the cross-border payments and settlements involve various correspondent and local banks, which incur high fees and time delays. The number of correspondent banks is also declining as a result of a larger investigation by the authorities to prevent the use of cross -border payments for criminal activity.

The Bank for International Settlements (BIS) Innovation Hub drives several cross -border currency projects to solve these problems. For example, Project Mbridge is a collaborative experiment involving the central banks of China, Hong Kong, Thailand and the UAE. The project aims to connect CBDCs and digital wallets issued by the central bank of each member on the basis of scattered Ledger technology in a general technical infrastructure, which enables immediate and low cost border border foreign exchange transfers. Member Central Banks can also link CBDCs to their existing real -time gross settlement systems without changing existing systems. Project Mbridge is progressing to practical implementation, while the Saudi Central Bank joins a new member. If implemented successfully, companies that participate in international trade and financial transactions can save significant time and fees.

The BOJ is now participating in the BIS CEH HUB’s project Angola, an initiative involving six other central banks, including the Banque de France (representing the Eurocystem) and the Federal Reserve Bank of New York, as well as different commercial banks. The goal is to investigate how shown commercial bank deposits can be integrated with CBDCs to improve wholesale boundary payments.

Project Nexus is another interesting experiment conducted by the Bis Innovation Hub Center in Singapore with central banks and domestic direct payment systems in Southeast Asia. This project aims to link domestic direct payment systems via the Nexus platform and create a standardized fast payment system that all other countries can reach on the network.

These examples, and the wide variety of countries participating in it, indicate that there is global interest in easier to facilitate international transactions and generous space to improve efficiency in borderline payments through CBDCs. The network effects of such innovations will be improved as more central banks and financial institutions participate in continuous projects. The BOJ would be wise to further investigate the significant potential implications of CBDCs for the global financial system.

Sayuri Shirai is a professor of economics at the Faculty of Policy Management, Keio University, and a former Bank of Japan board member.