MNI INTERVIEW: A Future Digital Yen May Pay Interest-BOJ Exec

A future digital yen could bear interest, a senior Bank of Japan official told MNI, with payments linked to deposits in commercial banks to avoid disruption to the financial system.

A digital currency could potentially replace cash in the future, should costs associated with cash circulation exceed its benefits, Kazushige Kamiyama, director-general of Payment and Settlement Systems Department at the BOJ, indicated in an interview.

The BOJ in April began to look at the core functions of a central bank digital currency (CBDC) such as issuance, distribution, and redemption. This phase will be carried out through March 2022, for one year. But the BOJ currently has no plan to issue a CBDC.

Kamiyama said that interest payments on CBDC would need to avoid a significant fund shift from bank deposits and not disrupt the intermediation role of banks.

Bank deposit rates are nearly zero in Japan, potentially reducing the relative attractiveness of holding money in a conventional financial institution.

"As a central bank, the BOJ considers that it is extremely important that issuance of CBDC would not harm monetary policy implementation and the financial system. It is necessary to pay attention to these discussions. But the order of priority [for paying interest on a CBDC] isn't high, given that the current low-interest rate environment would continue," he said.

Also see: MNI: Digital Yuan Poses No Immediate USD Threat-BOJ Official.

WORK WITH BANKS

"A central bank alone cannot issue a CBDC. The BOJ has been consulting with private financial institutions from the beginning of examinations as we consider it necessary to jointly establish CBDC systems with private entities," he said.

"Compared with other central banks, that's a BOJ characteristic," Kamiyama said.

In its work on a digital currency, the BOJ has focused on ensuring interoperability with other payment and settlement systems at home, as well as on ensuring credibility by compliance with global standards for cross-border payments, Kamiyama said.

"The BOJ must consider a CBDC system that enables seamless connections, keeping the global standard in mind. The Bank must avoid a CBDC system from succumbing to 'Galapagos Syndrome'," Kamiyama said, drawing a metaphor with the South American island's isolated ecosystem.

He added that the standardisation is necessary if the BOJ plans to provide services along with private entities.

COSTS A FACTOR

With cash use still relatively high in Japan, costs associated with paper money and coins could conceivably at some point exceed their benefits, paving the way for a digital currency, he said. Kamiyama noted that many banks abroad are closing branches or reducing ATM networks to cut costs.

"Looking ahead, there is a possibility that banks might suspend cash provision if they face high cash-delivery costs. It could be too late for the BOJ to wait until then without taking action, so the BOJ must stand ready to respond to any scenario," Kamiyama said.

Central banks from the U.S., U.K., Switzerland, Sweden, Canada and Japan as well as the European Central Bank formed a working group with the BIS in 2020 for joint research on central bank digital currencies and CBDCs are an agenda item for the G7.

Kamiyama said the central banks in advanced economies are of the view that it is important to study the functions and features of CBDCs in case of future necessity.

"The U.S. Federal Reserve has planned to release a report on the merits and demerits of CBDC in September. But it would be a tentative plan for public consultation, and it would be different from a final draft," Kamiyama said.