The Bank of Japan (BOJ) has officially kicked off its first phase of testing for a central bank digital currency (CBDC), marking a pivotal step in the nation’s journey toward a digital yen. On April 5, the BOJ announced the launch of a proof-of-concept (PoC) initiative to evaluate the technical feasibility of issuing, circulating, and exchanging a digital version of the yen. This initial phase will run through March 2025, setting the stage for broader experimentation in the coming years.
As global interest in digital currencies intensifies, Japan’s move underscores its commitment to staying competitive in the evolving digital finance landscape. With central banks worldwide accelerating their CBDC research, the race to define the future of money is well underway.
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First Phase Focus: Core Functionality Testing
The Bank of Japan’s first-stage PoC centers on assessing fundamental CBDC functions, including issuance, distribution, and redemption. During this year-long period, the central bank will simulate backend operations to evaluate system resilience, transaction speed, and security protocols.
While the BOJ emphasizes that there is currently no plan to issue a digital yen, it views these experiments as essential for preparedness. Shinichi Uchida, Executive Director at the BOJ, stated, “We don’t have plans to launch a CBDC now, but initiating these trials is a necessary step to understand the implications and opportunities.”
Following this initial phase, the BOJ plans to enter a second stage focused on advanced features—such as setting holding limits per individual or entity and enhancing anti-money laundering (AML) safeguards. If warranted, a third phase may involve real-world pilot programs with payment service providers and end users.
Japan’s groundwork for digital currency research dates back to 2016, when it partnered with the European Central Bank on the “Stella” project—a joint exploration of distributed ledger technology (DLT) for cross-border payments. Over four phases, Stella analyzed settlement efficiency, privacy, and scalability, laying foundational insights for future CBDC development.
In October 2020, the BOJ released a comprehensive report outlining its CBDC strategy. It acknowledged rising public demand driven by rapid technological change and stressed the importance of maintaining stability and efficiency in Japan’s payment ecosystem. The report also detailed a three-phase testing roadmap, aligning closely with the current rollout.
Global Shift Toward Digital Currencies Accelerates
Historically, central banks in advanced economies—including those in the U.S., Japan, and Europe—maintained cautious stances toward digital currencies. In 2018, former ECB President Mario Draghi dismissed any immediate plans for a digital euro. Similarly, BOJ Governor Haruhiko Kuroda stated in 2019 that while research was ongoing, there were no intentions to issue a digital yen.
That outlook began shifting in 2020. The U.S.-based Digital Dollar Project published its first whitepaper outlining a framework for a potential digital dollar. Federal Reserve Chair Jerome Powell later confirmed that 2025 would be a key year for public engagement on the topic, noting that legislative approval from Congress would likely be required before any launch.
Meanwhile, the European Central Bank released its digital euro report in October 2020, signaling readiness to move forward if conditions demand it. Japan followed suit with its own strategic publication, reflecting a coordinated global pivot.
Experts attribute this shift to two primary factors: the impact of the pandemic and intensifying international competition. Liu Bin, Financial Research Director at the China (Shanghai) Pilot Free Trade Zone Research Institute, explained: “The pandemic exposed weaknesses in traditional payment infrastructures. Countries realized they needed faster, more resilient systems—digital currencies offer that potential.”
Moreover, nations are increasingly aware of the geopolitical stakes. Establishing early leadership in CBDC development could influence global financial standards and enhance currency sovereignty in an era dominated by private cryptocurrencies like Bitcoin and Ethereum.
Liu added, “While countries like the U.S. and Europe reacted to external pressures, China’s early start reflects a strategic push for RMB internationalization. Japan’s current move is about securing relevance in an increasingly competitive digital currency arena.”
Key Challenges Ahead for Japan’s CBDC Development
Despite progress, Japan faces significant hurdles before a full-scale digital yen can become reality. According to Liu Bin, four critical challenges must be addressed:
1. System Architecture Design
The BOJ must decide whether to pursue a wholesale or retail CBDC model. A retail CBDC—like China’s Digital Currency Electronic Payment (DCEP)—is accessible to the general public and supports everyday transactions. In contrast, wholesale models serve financial institutions only.
Japan’s report suggests a preference for a retail CBDC that supports private-sector innovation while preserving a two-tier system where commercial banks act as intermediaries. This approach demands robust interoperability, universal access, instant settlement, and strong cybersecurity measures.
2. Technology Selection
Will blockchain form the backbone of Japan’s digital yen? While DLT offers transparency and decentralization benefits, it also raises concerns about scalability and energy consumption. The BOJ must determine where and how to apply blockchain—or whether alternative technologies might better serve specific functions.
3. Cross-Border Compatibility
For Japan—a major trading nation—ensuring that its CBDC can interact seamlessly with other countries’ digital currencies is crucial. Achieving alignment with global standards will require active participation in international forums such as the Bank for International Settlements (BIS) and G20 working groups.
4. Real-World Use Cases
Unlike China, where mobile payments via Alipay and WeChat dominate daily life, Japan still relies heavily on cash and card-based systems. Transitioning consumers to digital wallets will require targeted education campaigns and compelling incentives.
The BOJ also continues studying critical policy issues:
- Collaboration models between central banks and private payment providers
- Economic design elements like issuance volume and holding caps
- Privacy protection and data governance
- Technical standardization across platforms
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Frequently Asked Questions (FAQ)
Q: Is Japan planning to replace physical yen with digital currency?
A: No. The Bank of Japan has stated that any future CBDC would complement—not replace—cash, ensuring citizens retain access to physical money.
Q: When might Japan launch a digital yen?
A: There is no official launch date yet. The current testing phase runs through March 2025, with further stages depending on results and policy decisions.
Q: Will individuals be able to hold digital yen directly with the central bank?
A: Likely not. Japan favors an indirect model where commercial banks and payment firms distribute the digital currency, preserving financial stability.
Q: How does Japan’s CBDC compare to China’s digital yuan?
A: China’s DCEP is already in advanced pilot stages with millions of users. Japan is earlier in development but may benefit from observing real-world implementations elsewhere.
Q: Could a digital yen help fight financial crime?
A: Yes. With controlled anonymity features, a CBDC could enable better transaction tracking while protecting user privacy—potentially reducing fraud and illicit activity.
Q: What role does cryptocurrency market growth play in CBDC development?
A: Rapid growth—cryptocurrencies surpassed $2 trillion in market cap in early 2025—has heightened concerns about financial stability and monetary control, prompting central banks to act.
Japan’s entry into active CBDC testing reflects a broader global trend: central banks are no longer观望 (on standby)—they’re preparing for a digitized financial future. While challenges remain, the nation’s methodical approach positions it as a thoughtful participant in the next generation of money.
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