Today, Nikkei reported that the Bank of Japan (BoJ) is coordinating with the country’s three largest banks, MUFG, SMBC, and Mizuho, ​​to participate in retail central bank digital currency (CBDC) experiments. Regional banks and fintechs will also participate in tests of the digital yen, which will start in spring 2023.

Based on our knowledge of the central bank roadmap, we believe this is still part of the second phase of Proofs of Concept (PoC). Phase 2 started in April 2022 and was expected to continue for at least one year. One of the issues is coordination with intermediaries.

The Bank of Japan has not yet made a decision to proceed with a CBDC. There is expected to be a pilot for two years or more, with a decision around 2026. It has previously been said that there must be a national consensus to proceed interpreted as a referendum.

Intermediary experiments will focus on moving money between bank accounts and digital currency, and will also include offline experiments. Fintechs will get involved in security and identity verification, and the central bank expects private companies to send staff to the BoJ.

The CBDC is likely to be bead-based. In the first phase of the PoC research, the central bank experimented with account- and token-based CBDCs and was not happy with the performance of the latter.

In the current second phase of PoC, in addition to interacting with intermediaries, the topic areas are improving the convenience of payments and economic designs. For example, the BoJ is looking into limiting CBDC holdings, controlling transaction amounts, and considering whether a CBDC should earn interest.

Japan was an early explorer of CBDC, with several rounds of research before Facebook introduced Libra. In October 2020, it was one of seven central banks to publish a joint paper with the BIS on digital currency. Also in 2020, the Bank of Japan released a report on offline CBDC usage.