Japan will have more clarity on the design of its central bank digital currency (CBDC) no earlier than late 2022, according to a ruling party official.

Hideki Murai, head of the ruling Liberal Democratic Party of Japan’s panel on digital currencies, said that the Bank of Japan (BoJ) is still working on sorting out the key functions of the digital yen, such as defining what entities would serve as intermediaries between the central bank and its deposit holders.

“By around the end of next year, we’ll have a clearer view of what Japan's CBDC would look like,” Murai said in a Reuters interview on Friday. The official said that the BoJ does not expect to make an immediate decision on whether to issue a digital yen by the start of the second-phase CBDC testing — slated to start next year. 

However, more details on Japan’s CBDC design could trigger a debate on how the digital yen will affect financial institutions, the official suggested.

Japan's financial industry is already undergoing major changes, with non-bank firms increasingly offering means for online settlements. If the digital yen is designed in a way that makes commercial banks key intermediaries, that shift could be reversed, Murai noted, adding:

“If the BoJ were to issue [a] CBDC, it would have a huge impact on financial institutions and Japan's settlement system. [A] CBDC has the potential to completely reshape changes occurring in Japan's financial industry.”

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The official also said that the BoJ must ensure that the digital yen is compatible with other global CBDCs in order to counter China’s progress with its digital yuan. “If a digital yuan becomes so convenient it’s frequently used by tourists or becomes the main settlement means for trade, the relationship between the yen and yuan could change,” eroding the yen’s status as a safe-haven currency, Murai warned.

The BoJ originally announced its plans to develop a CBDC in October 2020, stressing that the bank has “no plan to issue CBDC” yet. The bank launched its first phase of CBDC pilots in April 2021, targeting the development of a test environment and conducting experiments on basic CBDC functions related to payment, issuance, distribution and redemption.