The Bank of Japan has said that it will start testing a central bank digital currency (CBDC) in early fiscal 2021.
The BOJ said Friday it will create a system on the internet, where the basic functions of the CBDC, including its issuance and circulation, will be tested. The central bank will then work on more advanced experiments.
Although the BOJ has said that it has no plans to issue a CBDC, it will step up preparations in response to moves by China, which is ahead of other countries in the field, and Prime Minister Yoshihide Suga's policy focus on digitalization.
The BOJ assumes that private financial institutions will take an intermediary function for a CBDC that may be issued by the Japanese central bank, and that the digital currency will be used widely by general consumers, companies and others.
The test will be held in three stages. The final stage of the test will involve private businesses and consumers to examine the feasibility and safety of the digital currency as a method of payment on par with cash.
The BOJ will also start discussions on a digital currency framework, including the division of roles between the central bank and private-sector businesses, and the handling of personal information.
It will work with private businesses, legal experts and related authorities to sort out related issues, such as the impacts on prices and the financial system.
In January, six major central banks, including the BOJ, the European Central Bank, the Swiss National Bank and the Bank of England, as well as the Bank for International Settlements launched a joint research group on CBDCs. The U.S. Federal Reserve joined the group later.
Also on Friday, the seven central banks and the BIS announced a report on CBDCs, which highlighted three key principles.
Specifically, it said that CBDCs should coexist with cash and other types of money in a flexible and innovative payment system, support wider policy objectives and do no harm to monetary and financial stability, and promote innovation and efficiency.
"The speed of innovation in payments and money-related technologies requires the prioritization of collaborative experimentation" by the central banks, the report said.
The joint group's research is set to be reported at a session of finance ministers and central bank chiefs of the Group of 20 advanced and emerging economies on Wednesday.