Kanan Mammadov
Japan has long been known for its love of cash, but that is rapidly changing. From just 13.2 per cent in 2010, cashless payments made up 42.8 per cent of all transactions by 2024, exceeding the government’s target of 40 per cent a year ahead of schedule.
In response to this dramatic shift, the Bank of Japan (BOJ) launched a pilot program in 2023 to explore a central bank digital currency (CBDC) — a digital yen — in collaboration with private firms. While no decision has been made to issue a CBDC yet, officials are laying the groundwork to ensure the yen remains relevant in an increasingly cashless future.
An aging population and deep-rooted cash habits had left Japan a laggard in digital payments. Since the COVID-19 pandemic, younger, tech-savvy Japanese consumers are embracing mobile payment apps. Policymakers now view the cashless transition as vital to boost productivity, cut costs and better integrate Japan’s economy into the global marketplace. Still, only about 39.3 per cent of Japanese consumer spending was cashless in 2023 — a record high for Japan but low compared to China’s over 80 per cent. Determined to catch up, the government has set ambitious goals eyeing 80 per cent cashless adoption and introduced incentives like reward-point programs.
Against this backdrop, the BOJ’s CBDC pilot has become a cornerstone of Japan’s financial strategy. Since April 2023, the central bank has engaged around 60 institutions in experiments to gauge the feasibility of a digital yen. Working groups are examining its technological and legal dimensions, from cybersecurity to how a digital yen would integrate with existing payment networks. Reviewing advanced technologies like blockchain, officials note that any digital yen must be as reliable and fast as current domestic payment systems which today’s blockchain solutions may not yet meet. This cautious, consultative strategy reflects Japan’s very careful approach to monetary innovation.
BOJ leaders frame the digital yen as a way to future-proof the currency rather than a quick disruption. The central bank wants to be ready — refining technology, security, and policy frameworks now — so that when needed, the digital yen can be deployed smoothly. The launch timeline remains uncertain and likely years away, depending on evidence of public demand and political consensus.International context is also driving Japan’s plans. China’s digital yuan (e-CNY) has raced ahead — transactions in the e-CNY more than tripled between mid-2023 and mid-2024 — showcasing Beijing’s ambition to lead in digital currency. The BOJ is actively participating in global forums like the Bank for International Settlements’ Project Agora on cross-border CBDC interoperability. By helping shape international standards and ensuring a future digital yen can work seamlessly abroad, Japan aims to safeguard its monetary sovereignty.
A carefully designed digital yen could bring benefits but also challenges for banks and policymakers. Commercial banks worry a CBDC could spur a deposit exodus if people can hold money directly with the BOJ. Experts warn a poorly designed CBDC might trigger a ‘sudden or continuous outflow’ of funds from bank deposits, squeezing banks’ ability to lend. In more authoritarian systems like China’s, digital currencies have been used for surveillance and social control, raising concerns about government misuse. Technical issues like power outages or data breaches could temporarily cut users off from their funds, posing serious reliability concerns.
Japan’s strategy seeks to avoid these pitfalls through multiple safeguards: retaining physical cash as a parallel option, ensuring the digital yen is privacy-protective, involving private banks as intermediaries and capping individual CBDC holdings with no interest on digital yen. By anchoring the CBDC in democratic oversight and emphasising resilience and choice, Japan aims to build trust and avoid destabilising the banking system while reaping the benefits of digitalisation.
Ultimately, Japanese consumers will shape the fate of a digital yen. People are accustomed to the yen being stable and universally accepted — the same must hold true in digital form. Adoption may start gradually, but convenience is a very powerful driver.
If the digital yen offers clear benefits like fee-free instant payments or easier e-commerce and peer-to-peer transfers, many consumers are likely to give it a try. Over time, a well-implemented CBDC could accelerate Japan’s evolution towards a truly cash-light economy.
Regionally, a digital yen could counterbalance China’s e-CNY, providing an alternative so no single digital currency dominates regional commerce and paving the way for more interconnected digital payment networks. But if Japan moves too slowly, it risks seeing the yen’s global role diminish as others set the rules of digital finance. This recognition is driving a delicate balance — the BOJ will not rush a digital yen to market, but it is moving with purpose to avoid being left behind. The CBDC pilot is a statement of intent that Japan is preparing its currency for a new era.
Japan’s deliberate and inclusive approach offers a potential blueprint for how democratic countries can enter the digital currency space without sacrificing financial stability or civil liberties. While there are real risks, Japan’s emphasis on public trust, technological reliability and gradual adoption is a thoughtful path forward. The digital yen could be a powerful example of innovation done responsibly.
Kanan Mammadov is a master’s student and Research and Graduate Assistant at George Washington University.
Source: East Asia Forum
