Central Bank Digital Currency experiments continue, but the Bank of Japan does not consider implementation due to main factor: Cash is King

Former Bank of Japan policy board member and professor at Keio University, Sayuri Shirai, recently spoke at the East Asia Forum and published an article. She mentioned that Japan has been experimenting with Central Bank Digital Currency (CBDC) since 2021, but the Bank of Japan is not considering its implementation in the near future. The current experiments are aimed at keeping pace with the technological features provided by blockchain in case there is a demand for CBDC.

However, the Bank of Japan is currently not considering the implementation of CBDC. She believes the main reasons for this are:

Factors Hindering Japan's CBDC: Cash is King

In Japan, the public has easy access to banking systems, and financial inclusion is not a major policy issue. At the same time, the use of digital and mobile payments operated by private companies is quite common. Due to the prevalence of online banking, credit cards, and electronic payment tools, CBDC has not received strong support. Private company digital payment services also offer incentives in the form of points that can be accumulated for goods and services.

Although the use of cash in Japan has been declining, its circulation remains high. Cash is widely accepted for its security and liquidity in paying for goods and services, accounting for 20% of nominal GDP. Cash becomes even more valuable in cases of natural disasters and military conflicts, power shortages, computer system breakdowns, and weakened trust in private banking systems. Additionally, elderly and low-income populations prefer using cash. With Japan's aging population constituting one-third of the current population, the demand for cash is widespread. The Bank of Japan believes that despite the high handling costs and elevated crime risks associated with cash, preserving cash in the economy is still crucial; even in highly digitalized economies like Finland, cash payments increased in 2019-2020.

Circulation of Cash Continues to Increase

Professor Shirai argues that the prolonged low-interest rate environment under loose monetary policies helps reduce the opportunity cost of holding cash. Retail bank account interest rates have remained at 0.001% since 2017. This has turned cash into an alternative to bank deposits, fueling the hoarding trend of cash in Japan. Furthermore, some criminal activities related to holding cash also support the demand for cash.

She suggests that the prevalence of cash in the Japanese economy may hinder new tech companies' innovation in payment methods and financial activities. However, the Bank of Japan will continue to accumulate blockchain knowledge to ensure Japan's financial stability and innovation. Moreover, considering the efficiency and cost of cross-border payments, CBDC would be a good choice.

In addition, the Central Bank of Taiwan will also conduct a general CBDC trial program in September, but currently, there is no issuance plan in place.