Top Japanese bankers and officials say digital currency development is a top priority now as the country “trails behind” China and South Korea in similar projects.
Either way, it’s indisputable that consumers prefer traditional forms of transacting. Checking accounts are virtually non-existent in the land of the rising sun, so cutting a check is rare. Credit cards, on the other, are widely available. Yet, consumers’ frugal attitudes result in limited use.
Indeed, use of credit cards account for some 17 percent of transactions. Compare this to 21 percent in America where consumers also rely heavily on other electronic payments. Moreover, the cash in circulation in Japan accounts for 20 percent of GDP, while physical tender accounts for 8.3 and 9.5 percent in the U.S. and China, respectively.
Still, Japan’s massive debt-load implies problems for the yen going forward. Currently, debt in the country accounts for 237 percent of GDP, the largest in the world. Historically, such an excessive debt-to-GDP ratio implies a high risk of default and a weak demand for a government’s bonds. According to Luke Gromen of FFTT research firm, 50 of 51 countries to ever reach a debt-to-GDP ratio above 130 percent have defaulted, Japan being the sole exception. When a developed country defaults, it typically inflates away its outstanding obligations by weakening its currency. If Japan were to succumb to this fate, it implies a tumultuous time for the yen.
Japan to Move Quick With CBDC Plans
The Japanese government has placed digital currency development on an urgent status since this July, with a team of about 10 members at the Bank of Japan (BoJ) have been working towards the development of a central bank digital currency (CBDC), a digitized version of the yen.
Officials said a potential digital currency could operate on distributed ledger technology or blockchain technology, but this remains uncertain as the scalability and viable around using blockchains remains. An important consideration is that of natural disasters — the BoJ wants to see currencies operate seamlessly during such times and even power outages.
Takeshi Kimura, the BoJ’s department director-general, said the development of CBDCs is a “top priority.” He recently told a local Japanese news outlet that the bank will move forward with discussions while pushing up the level of consideration beyond the preparatory stage.
He further noted that the CBDC will replace cash and force the consolidation of other electronic payments, but declined did not provide a timeline for the rollout.
The BoJ recently appointed top economist Kazushige Kamiyama to head its payments and settlement department which oversees digital currencies. Kamiyama previously directed the use of big data in analyzing the effects of COVID-19 on the economy.
A Currency Race
As a country that relies on cash for 80 percent of transactions, the competition is stemming from a post-COVID narrative of cashless payments gaining traction over their fiat counterparts.
The report noted:
“The economic implications of the ongoing pandemic are vast, with numerous economists and analysts suggesting a slowdown in global productivity.”
As the global reserve currency, the dollar is the primary currency in which most of the world’s trade occurs. Current economic conditions have led world leaders to suggest a “Great Reset” to the global economy, it added.
The report follows an earlier post by BTCManager which noted the new Japanese digital currency team will continue the research work conducted by a previous team formed early in 2020.