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Currencies

BOJ to start trials on digital yen next year as China moves ahead

G-7 central banks play catch-up to Beijing's planned virtual currency

Central banks face the challenge of issuing digital currencies without undermining policy tools like interest rates. (Nikkei montage)

TOKYO -- The Bank of Japan said Friday it plans to begin trials next year for a central bank-issued digital currency as part of an international joint research effort.

The BOJ aims to start the trial early in the next fiscal year, which begins March 2021. The central bank said it has no plans to issue a digital yen, but it will lay the groundwork for such a move.

The same day, a group of central banks including the BOJ and the U.S. Federal Reserve issued a report that sets out principles to guide the development of central bank digital currencies, or CBDCs. The effort signals a sense of urgency over China, which is a step ahead in moving toward a digital currency.

China is already conducting trials of a digital yuan and aims to begin issuance by the 2022 Winter Olympics in Beijing.

If China develops a competitive digital currency, the U.S. will lose global influence, said Aditi Kumar, executive director of the Belfer Center for Science and International Affairs at Harvard University.

In that scenario, the yuan would form the axis of a new economic sphere chiefly occupied by emerging nations.

The use of digital payment methods, including cryptocurrencies, is on the rise. Facebook, for example, is planning to release its own digital currency, dubbed Libra.

But the growing circulation of digital currencies has produced a number of economic and national security risks, such as leaks of payment data to other countries and the use of cryptocurrency to finance terror.

Central banks see issuing their own digital currencies as a way to counter such risks. Replacing cash with digital currency would also cut down on safekeeping and transport costs.

The European Central Bank plans trials of a virtual currency next year, and the U.S. is studying the idea.

In theory, if a non-state-issued currency grows in circulation, interest rate adjustments and other monetary policy tools could lose their effectiveness. Central banks would lose their ability to guide inflation, potentially dealing a blow to the economies.

The BOJ, the ECB and other central banks formed a joint research group in January with the Bank for International Settlements to study the benefits and costs of issuing CBDCs. The partners issued a joint report Friday listing the foundational principles regarding the issuing of digital currencies.

The document calls for coexistence with cash and private-sector digital currencies. CBDCs should support policy objectives of the central banks, do no harm to monetary and financial stability, and promote innovation and efficiency, according to the report.

The partnership does not include the People's Bank of China, the country's central bank. China has launched the digital yuan on a trial basis in select cities. Another pilot program will begin Monday evening in Shenzhen, where 50,000 residents will use the digital currency in roughly 3,400 stores.

The BOJ's plan will be conducted in three stages, with the first to examine the technical feasibility of basic functions of a digital currency. This will be done in a test environment that will monitor any problems that occur in electronic monetary transactions. 

In the second phase, the bank will test additional functions, such as the ability to set interest rates and limits on digital currency holdings. If needed, a pilot program will be launched in the third phase, which will allow private sector operators and consumers to participate for the first time.

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