In Japan, cashless payment tools have become increasingly common. Japanese citizens are now comfortable with using credit cards and the severe labor shortage has accelerated the automation of payments. The cash-free payment ratio for consumption reached nearly 40 per cent in 2023, a big improvement from 13 per cent in 2010.

But Japan remains one of the world’s few cash-centric economies. The ratio of cash in circulation to nominal GDP has hovered around 20 per cent for many years, much higher than the corresponding rates of 12 per cent in India, 9 per cent in China, 8 per cent in the United States and South Korea and sub–1 per cent in Sweden.

Japan is aging at the fastest rate in the world with around a third of its citizens aged 65 or older. Its average real GDP growth has long remained below 1 per cent and the domestic market size is expected to shrink. This explains why some small stores, clinics and hospitals want to avoid the costs and fees associated with installing equipment or using digital payment services. Japan’s slow progress in digitalising the economy is evident in the fact that many still use traditional stamps engraved with family names called ‘hanko’, send faxes and file their taxes on paper.

In some countries, the use of cash is refused at many places so citizens must become accustomed to electronic money. Transforming Japan in this way might be politically challenging due to the likelihood of resistance from the only demographic that’s growing in size — senior citizens.

Japan, like many other countries around the world, is nonetheless interested in the possibility of setting up a Central Bank Digital Currency (CBDC). More than a hundred central banks worldwide are investigating the feasibility of CBDCs and some countries, like Nigeria and the Bahamas, have actually implemented their currencies. Many of the central banks that are particularly interested in issuing CDBCs are located in emerging economies, where not all citizens have a bank account due to a lack of branches and ATMs in remote areas. As most people have mobile phones, promoting electronic payments and the use of safe digital currencies benefits the population.

One exception to this trend is the European Central Bank, which has been actively investigating a ‘digital euro’ CBDC. The digital euro could further deepen the currency union and generate greater efficiency by introducing a digital payment option accessible to everyone in the entire Euro area.

But Japan offers no such network effects given its declining population. The Bank of Japan (BOJ) has stressed that it has no plans to issue a CBDC but is exploring how it could be quickly implemented if a future government decides to issue one. But even if a CBDC were to be issued, many citizens would likely stick to cash or digital payments offered by private-sector banks and payment service providers. Considering the costs of designing a retail–ready CBDC that is resilient against various illegal uses and cyberattacks, the benefit of a CBDC for the general public is likely to be low in Japan.

The BOJ should instead consider issuing CBDCs to reduce cross-border transaction costs. Currently, cross-border payment and settlement processes involve multiple correspondent and local banks, incurring high fees and time delays. The number of correspondent banks is also decreasing due to increased scrutiny by authorities to prevent the use of cross-border payments for criminal activities.

The Bank for International Settlements (BIS) Innovation Hub is driving several cross-border currency projects to resolve these issues. For example, Project mBridge is a collaborative experiment involving the central banks of China, Hong Kong, Thailand and the UAE. The project aims to link CBDCs and digital wallets issued by each member’s central bank using distributed-ledger technology in a common technical infrastructure, which would enable instant and low-cost cross-border foreign exchange transfers. Member central banks can also connect CBDCs to their existing real–time gross settlement systems without changing existing systems. Project mBridge is progressing toward practical implementation with the Saudi central bank joining as a new member. If it is successfully implemented, companies engaging in international trade and financial transactions could save significant time and fees.

The BOJ is now participating in the BIS Hub’s Project Angola, an initiative that involves six other central banks including the Banque de France (representing the Eurosystem) and the Federal Reserve Bank of New York, as well as various commercial banks. The objective is to explore how tokenised commercial bank deposits could be integrated with CBDCs to enhance wholesale cross-border payments.

Project Nexus is another interesting experiment conducted by the BIS Innovation Hub Centre in Singapore with central banks and domestic instant payment systems in Southeast Asia. This project aims to link domestic instant payment systems through the Nexus platform and create a standardised fast payments system that could reach all other countries on the network.

These examples, and the wide range of countries participating in them, indicate that there is global interest in facilitating easier international transactions and ample room to improve efficiency in cross-border payments through CBDCs. The network effects of such innovations will be enhanced if more central banks and financial institutions participate in ongoing projects. The BOJ would be wise to further investigate the significant potential implications of CBDCs for the global financial system.

_Sayuri Shirai is Professor of Economics at the Faculty of Policy Management, Keio University, and a former board member of the Bank of Japan. _

Image by Stephen Kelly and sourced from Wikimedia Commons here.