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BoJ official says digital yen will not be used to achieve negative interest rate

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

BoJ Executive Director Shinichi Uchida made the announcement in his recent public speech.

“While the idea of ​​using such a feature as a means of achieving a negative interest rate is sometimes debated in the academic community, the bank will not adopt CBDC for this reason.”

Japan first introduced negative interest rates in 2016 to combat decades of deflation by encouraging borrowing and spending. Negative interest rates are only used by central banks during a recession as a last resort to stimulate an economy by encouraging borrowing and spending, paying interest to borrowers rather than lenders.

Hiromi Yamaoka, former head of the BoJ’s financial processing department, echoed this sentiment, warning earlier this year that CBDCs could potentially destroy the Japanese economy. While Yamaoka approved of the idea of ​​digitizing payment methods, he did not support the idea of ​​using a CBDC for this.

Wall Street Journal senior columnist James Mackintosh has similarly argued that the difference between a CBDC and cash would be highlighted if interest rates fell below zero. People would be more inclined to hold onto physical cash to “earn zero” rather than lose money on a central bank-issued digital dollar.

In his speech, Uchida explained that Japanese citizens can expect the CBDC to be released with a number of unique features as the creation of the digital yen progresses.

The bank is considering capping the transaction amount of each person or company for the duration of the pilot, and is also considering making the digital yen an interest-bearing asset or not.

The BoJ first announced its three-phase experimental plan for its central bank digital currency (CBDC) in October 2020. The first two phases of the trial will focus on proof of concept testing, while the third phase will see a pilot currency launched.

The first phase started in April 2021 and ended on March 22 of this year. The BoJ began its second phase of testing on March 24, stating that it would begin testing the more technical aspects surrounding the digital yen issuance.

However, BoJ Governor Haruhiko Kuroda announced earlier this month at Japan’s FIN/SUM fintech summit that he has no plans to launch a CBDC any time soon.

Related: Former BOJ official warns against using digital yen in financial sector

Kuroda explained that the BoJ plans to carefully consider the expected role of central bank money in the lives of Japanese citizens before making any major decisions or announcements.

“We believe it is important to prepare thoroughly to respond appropriately to changing circumstances in order to ensure the stability and efficiency of the overall payment and settlement systems.”

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