BOJ Official Says Digital Yen Will Not Use Negative Rates

The Bank of Japan (BoJ) has said that its central bank digital currency (CBDC), the digital yen, will not be used to help achieve negative interest rates.

The BOJ executive director Shinichi Uchida made the announcement in a recent public speech.

“While academics sometimes discuss the idea of using this function as a means of achieving negative interest rates, the BOJ will not introduce a CBDC on this basis.”

Japan initially adopted negative interest rates in 2016 in an attempt to combat decades of deflation by encouraging borrowing and spending. Negative rates are only a last resort for central banks during a recession to stimulate the economy by encouraging borrowing and spending, with interest paid to borrowers rather than lenders.

Echoing this is Hiromi Yamaoka, the former head of the Bank of Japan’s financial settlement department, who warned earlier this year that a CBDC could disrupt the Japanese economy. While Yamaoka agrees with the idea of digitizing payment methods, he does not support the idea of using a CBDC.

"Wall Street Journal" senior columnist James Mackintosh also believes that if interest rates fall below zero, the difference between CBDC and cash will be highlighted. People will be more inclined to hold physical cash to "earn zero yield" than to lose money on the digital yen issued by the central bank.

In his speech, Shinichi said that if the creation of a digital yen does move forward, Japanese citizens can look forward to the issuance of a CBDC with a range of unique features.

The bank is considering imposing limits on transaction amounts per individual or entity during the pilot period, and is also considering whether to include the digital yen as an interest-bearing asset.

The Bank of Japan first shared the outline of a three-phase trial of its central bank digital currency (CBDC) in October 2020. The first two phases of the trial focused on testing a proof-of-concept, while the third phase will see the launch of the pilot currency.

The first phase started in April 2021 and ended on March 22 this year. The BOJ began the second phase of the experiment on March 24, saying it would start testing more technical aspects of the digital yen issuance.

However, Bank of Japan Governor Haruhiko Kuroda announced at Japan’s FIN/SUM fintech summit earlier this month that there are no immediate plans to introduce a CBDC.

Kuroda explained that the BOJ plans to carefully consider the intended role of the central bank's currency in the lives of Japanese citizens before making any major decisions or announcements.

"We believe it is important to thoroughly prepare for changes in the situation in an appropriate manner from the standpoint of ensuring the stability and efficiency of the entire payment and settlement system."

The popularity of CBDCs continues to grow as governments around the world focus on the potential benefits of digital assets. On Tuesday, April 12, the Central Bank of Brazil confirmed that it will launch a CBDC pilot program in the second half of this year, while the South African Reserve Bank completed a technical proof of concept for its CBDC.