The Bank of Japan confirmed today that its central bank digital currency (CBDC) research will enter a pilot phase in April, following two years of proof-of-concept (PoC).

The central bank has not yet decided to issue a digital yen. The final decision may require a referendum. The central bank sees the multi-phase pilot program as a first step to find designs that can address the needs of users, stakeholders and society. “A payment method is not something that becomes the norm once an ideal deal is presented to the world,” said CEO Uchida Shinichi.

He outlined two goals for the pilot phase. To date, its PoC testing has been largely internal, so now it wants to test the technical feasibility of the integration with banks, intermediary networks, and other interested parties. It intends to test the end-to-end payment flow. However, in the first instance, there will be no live transactions with retailers, only simulations.

The second objective is to engage with the private sector to improve the design of the digital yen. This will include the establishment of a CBDC forum involving private sector payment providers. As part of this goal, the areas it plans to explore include:

• challenges in integrating a CBDC with external systems
• offline payments
• value added services
• Challenges at user touchpoints.

Given the 2011 tsunami, Japan was one of the first countries to investigate the potential of an offline CBDC.

Previous digital yen proofs of concept

Japan’s first CBDC PoC began in April 2021, with the second following a year later. During the first phase, the central bank experimented with the basics of establishing a ledger, issuing a token, and making payments. She explored an account-based and a token-based CBDC and was not happy with the performance of the latter.

During the second phase of the PoC, in addition to interacting with intermediaries, topics covered included improving the convenience of payments and economic designs. In particular, he looked at controlling the amounts of CBDC that users can have.

Meanwhile, private sector institutions have been preparing for possible trials of Japanese CBDCs. For example, JCB, the Japanese payment card network, has been working with IDEMIA and Soft Space on some proofs of concept to integrate a CBDC with existing payment cards. IDEMIA recently won an international award for its offline CBDC wallet solution.

Japan’s largest banks partnered with DeCurret and dozens of other Japanese companies to launch the Digital Currency Forum in 2021, where we believe the central bank was a bystander.