© Reuters. FILE PHOTO: A man wearing a protective mask stands outside the Bank of Japan headquarters amid the coronavirus disease (COVID-19) outbreak in Tokyo, Japan May 22, 2020.REUTERS / Kim Kyung -Hoon / File Photo

By Leika Kihara

TOKYO (Reuters) – Japan’s new political leadership calls on the country’s financial bureaucrats to step up efforts to issue a digital currency, stressing that China’s much faster progress poses a potential challenge to the global economic order.

The government has increased staff reviewing the legal and technical aspects of issuing a central bank digital currency (CBDC), which are digital forms of existing currencies.

While the political attention has yet to translate into another direct investment, it is also expected to keep the Bank of Japan (BOJ) under pressure to move away from its cautious and gradual approach to issuing bonds. a digital yen, analysts said.

“We need to think about what might happen to Japan’s national security if other countries adopt the CBDC,” said Takayuki Kobayashi, minister responsible for economic security – a new role created under the administration of Prime Minister Fumio Kishida. .

“Japan needs to speed things up to be ready to issue a digital yen at any time,” he said.

A world leader, China has already carried out tests in major cities for a possible launch of a digital yuan next year. Japan, along with other advanced G7 countries, has moved much more slowly.

The BOJ didn’t start the first phase of its experiment until April and says it has no immediate plans to issue a digital yen. Pilot programs, if any, will not take place until 2023 at the earliest.

This lukewarm stance can be tested as Kishida has made economic security a political priority and framed questions around the CBDC beyond finance into a matter of national security.

While G7 central banks generally agree on the need to counter China on privacy issues, the case is particularly strong for Japan as lawmakers worry about the growing economic strength of its assertive neighbor.

Some influential ruling party lawmakers see China’s advances on the CBDC as a potential threat to the dollar’s status as a global reserve currency and the financial dominance of Washington, Japan’s greatest ally.

A close Kishida aide told Reuters that Japan should “work closely with the United States to counter any attempts to threaten the dollar’s reserve currency status,” adding that the BOJ is coordinating with the Finance Ministry to ensure rapid progress in issuing a digital yen.

Opposition parties have also called in their election campaign programs to speed up the CBDC’s plans.

BOJ officials say China’s plan will not directly affect the timing of their CBDC experiments, as the primary purpose of issuing a digital yen is to provide the public with means of payment and settlement. practical and efficient.

What could affect the BOJ more than China’s plan would be how quickly its European and American counterparts announce plans to issue CBDCs, according to sources close to his thinking.

Debate over issuing a digital yen could intensify next year as the Kishida administration exposes details of its economic security plans and China promotes its digital yuan at the Olympic Games in Beijing winter in February.

“It is clear that Kishida’s administration and his ruling party wish to issue a digital yen,” said former BOJ board member Takahide Kiuchi, who is currently an economist at the Research Institute. Nomura from Japan.

“If China launches a digital yuan next year and the European Central Bank announces its intention to issue a digital euro, it will have a huge impact on Japan and increase the pressure on the BOJ.”