MNI POLICY: BOJ to Begin Trials on Digital Currency In 2021

The Bank of Japan will begin trials for a central bank digital currency (CBDC) in fiscal 2021 as part of an international joint research effort, the bank announced late Friday.

The BOJ has no plans to issue a digital currency right now, as demand for banknotes remains strong, but the bank sees the necessity of pre-emptively anticipating change.

Earlier Friday, a group of central banks, including the BOJ, the Federal Reserve and the Bank for International Settlements, issued a report that set out principles to guide the development of CBDCs. The effort signals a sense of urgency as China picks up the pace toward a digital currency.

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

The BOJ's plan will be conducted in three stages, with the first to examine the technical feasibility. 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.

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 could lose their ability to guide inflation.