Bank of Japan would not use CBDC to achieve negative interest rates

Shinichi Uchida, the executive director of the Bank of Japan, during his most recent public speech, stated that the digital yen, its central bank digital currency (CBDC), will not be utilized to achieve negative interest rates.

“While the idea of using such a functionality as a means to achieve a negative interest rate is sometimes discussed in academia, the Bank will not introduce CBDC on this ground.”

Negative interest rates in Japan

Negative interest rates were first implemented in Japan in 2016 as a means of combating decades of deflation by boosting borrowing and expenditure. Negative interest rates are only employed by central banks as a last resort to boost an economy by promoting borrowing and spending by paying interest to borrowers instead of lenders during a downturn.

The former head of the Bank of Japan’s financial settlement department Hiromi Yamaoka, who issued a warning earlier this year that CBDCs might potentially destroy the economy of Japan, echoed this sentiment. While Yamaoka supported the idea of digitizing payment systems, he opposed the use of a CBDC to do so.

Similarly, senior Wall Street Journal columnist James Mackintosh has claimed that if interest rates fell below zero, the difference between digital yen and cash would be underlined. People would rather keep their physical cash in order to “earn zero” than risk losing money on a CBDC issued by the central bank.

Uchida added in his address that if the development of the digital yen proceeds, Japanese citizens may expect the CBDC to be issued with a number of distinctive features.

For the duration of the trial, the bank is discussing setting a transaction limit on each individual or company, as well as whether or not to make the digital yen an interest-bearing asset.

CBDCs are becoming increasingly popular as governments worldwide consider the potential advantages of digital assets. Laos has partnered with a Japanese company to finish its CBDC developments, while Brazil’s central bank indicated that a CBDC pilot program would be launched by the second half of this year.