Bank of Japan to launch digital yen pilot program next year

The Bank of Japan is preparing to test its own central bank digital currency (CBDC), the digital yen, with the help of three major banks and regional institutions. The pilot program, which is estimated to last two years, will focus on testing the currency via several transactions, and experimenting with its functionality in environments without an Internet connection.

Bank of Japan to test digital yen CBDC

The Bank of Japan plans to test the functionality of a version of its CBDC, the digital yen, in partnership with three leading banks and several regional institutions, according to Nikkei. The results of the pilot program, which is expected to last two years, will be instrumental in the government’s decision to actually develop a digital yen.

The pilot program will include various tests of the currency to determine its behavior during daily transactions, such as deposits and withdrawals. The bank will also test its functionality in emergency situations, when Internet connections are limited or simply unavailable.

This will be the first CBDC test conducted by the Bank of Japan in collaboration with other financial institutions. Since April 2021, the bank has been conducting a proof of concept that tests the feasibility of a digital yen and its key functions and features. The institution has announced the second phase of these tests in March 2021.

No decision yet on issuance

However, testing is still focused on the functionality of the currency, and no decision on whether to issue a digital yen has been made yet.

Bank of Japan President Haruhiko Kuroda said on March 29 that the bank has no plans to issue a CBDC at this time, and that the tests are intended to prepare for “respond to changing circumstances appropriately, from the perspective of ensuring the stability and efficiency of the overall payment and settlement systems.“

The adoption of a nationwide digital currency will need to be supported by the legal system, which will need to define the role of the currency and the future of private banks in the resulting structure.

Other countries such as China have already issued their CBDC. The European Union is currently conducting a two-year test of the feasibility of issuing a digital euro, and the Federal Reserve Bank of New York announced on November 19 that it would test a proof of concept of a digital dollar designed to optimize settlement.