Eagerness within Japan's ruling Liberal Democratic Party for a digital yen is making the Bank of Japan nervous.
The BOJ has started early-stage joint research on central bank digital currencies with the European Central Bank and other global monetary authorities. Still, it has no immediate plans to issue one, preferring instead a prudent approach while sounding out public opinion. But that stance is coming under mounting political pressure.
In early February, a senior BOJ official and a senior LDP official close to Prime Minister Shinzo Abe discussed ongoing efforts by China to create a digital yuan. "It's not a threat yet, so there's no need to rush," the BOJ official said, adding that it would take Beijing another five to 10 years to succeed.
But several days after that meeting, a group of LDP lawmakers, led by party heavyweight Akira Amari, submitted a request to Finance Minister Taro Aso calling on the government to consider issuing a digital yen. "The BOJ probably wanted to stop the LDP from getting too proactive," the senior LDP official said of the bank's cautious stance.
Responsibility for currency issuance in Japan is at present shared by the BOJ and the Ministry of Finance. The former issues bank notes while the latter issues coins.
Despite being in no rush on a digital yen, the BOJ has also consistently taken the position that it should not be "backward-looking" either.The research among six central banks and the Bank for International Settlements that began in January was spurred by China beginning digital currency testing. That progress amplified worries that the world's second-largest economy will take the lead in setting international standards for digital currency technology.
It was also China's progress that pushed the LDP to act. Given the advance of Beijing's Belt and Road economic infrastructure-building initiative across Asia and Europe, the lawmakers wrote in their request that the possibility of the rapid spread of a digital yuan as a method to settle payments in developing countries with nascent financial systems "cannot be denied." They also worried that the risk of huge data flows from those countries to China will increase.
Separately, the LDP's Research Commission on the Finance and Banking Systems, an intraparty committee, is also discussing a BOJ-issued digital currency, representing another source of political pressure.
The BOJ, which would prefer to continue conducting research at its own pace, is now flashing warning signs. "We shouldn't be debating domestic [digital currency] issuance and economic security on the same stage," said another senior BOJ official. "If things get too noisy, it will just get harder to discuss this calmly." The point in the LDP proposal calling for Japan to quickly consider and prepare, while keeping an eye on the digital yuan, reflects a "giant leap," according to the official.
Regarding the merits of a central bank-issued digital currency, BOJ Deputy Gov. Masayoshi Amamiya on Feb. 27 said in a speech: "CBDC can help remove barriers of person-to-person payments and significantly improve the interoperability between different types of private digital money.''
But on the negative side, Amamiya also cautioned that a central bank-issued digital currency "could suppress private business and discourage innovations," indicating that both the benefits and drawbacks need careful consideration.
The finance ministry has been watching the developments calmly. "We need to think about the yuan's hegemony and whether or not Japan should issue a digital currency," said Finance Minister Taro Aso upon receiving the LDP request.
Aso, with China's expanding influence in mind, has argued that if central bank-issued digital currencies spread, the challenges should be addressed in an international context.
The BOJ, LDP and the government all appear to be trying to have their own way on the issue. But as the importance of responding to China's increasing importance grows, they are expected to eventually fall in line. But one thing is clear: Japan has begun to feel its way toward a central bank-issued digital currency.