Digital currencies, such as central bank digital currency (CBDC), electronic money, and cryptocurrency, have strategic implications for Japan’s economic security which could be inevitably influenced and conditioned by the changing global security environment. In this globalized world, a regional conflict that has occurred in a country in Europe could eventually affect the world economy as pointed out by Nobel Laureate economist Paul Krugman. In recent years, an increasing number of countries have tried to create their own CBDCs, and the Bank of Japan (BOJ) has also considered the technical feasibility of introducing Japan’s CBDC or digital yen. The BOJ has explained that international cooperation regarding CBDC would contribute to smoothing cross-border payment processes, and has conducted the first phase of experiments, such as issuing, distributing, and redeeming CBDC since April 2021.
Laying the Groundwork
A test run for a Japanese CBDC backed by bank deposits has been initiated by the Digital Currency Forum comprising more than 70 companies and organizations including three Japanese megabanks, i.e., Mitsubishi UFJ Financial Group, Inc. (MUFG), Sumitomo Mitsui Banking Corporation (SMBC), and Mizuho Bank. These Japanese banks have exerted their economic and political influence over arms control by refraining from investing in and extending loans to companies that are related to manufacturing nuclear weapons and delivery missiles. With substantial support from Japan’s top banks, the BOJ will end the first phase of this experiment in March 2022 and will move to the second phase of experiments on CBDC by testing several key features including a limit on the maximum amount that each entity can hold and use for transactions as of April 2022.
CBDC differs from electronic money or e-money, despite also being based on legal tender currency in contradistinction to cryptocurrency. People in Japan are familiar with e-money since prepaid train passes, such as Suica and Pasmo, have been utilized not only for commuting but also for purchasing inexpensive items at convenience stores. E-money has mainly been used by individuals and cannot be exchanged for real money, but CBDC will be exchangeable with real money, and therefore, might be able to lubricate domestic and foreign transactions. Since cashless payment applications have tended to lack interoperability, East Japan Railway Co. which issues Suica and the three megabanks have attempted to establish an interoperable infrastructure in preparation for the introduction of Japanese CBDC. In addition to using conventional e-money and cashless payment methods through prepaid cards, credit cards, and debit cards, Japan’s companies and population have been progressively prepared for the introduction of the digital yen.
In addition to CBDC and e-money, cryptocurrency has been used by investors in Japan. One of the most famous and prevalent digital currencies is Bitcoin, which was first proposed as a peer-to-peer electronic cash system in a research paper authored by Nakamoto Satoshi in 2008. Based on this research data, Bitcoin began to be utilized in January 2009, and El Salvador became the first country to adopt it as a legal currency in September 2021. Compared to CBDC and e-money, cryptocurrency is not based on legal tender, and sceptics have warned about a potential economic bubble and financial risks. Indeed, a major Japanese cryptocurrency exchange, Mt. Gox, collapsed following a major hack in 2014, and it is possible to steal cryptocurrency despite the improvement of blockchain technology. Also, lowering of the legal age of ownership from twenty to eighteen years has increased the fear of scams related to cryptocurrency in Japan. Despite all these legal, financial, and technical concerns, cryptocurrency remains popular in Japan, and Mitsui & Co. plan to create an original cryptocurrency linked to the yen-denominated price of gold, called ZipangCoin.
The Geopolitics of Digital Currency
Cryptocurrency and international payment methods have featured prominently in global discussions following the Russian invasion of Ukraine, which has featured the use of hybrid tactics. Internationally, the European Union, the United Kingdom, and the United States have agreed to exclude several Russian banks from the Society for Worldwide Interbank Financial Telecommunication (SWIFT), one of the world economy’s most prominent tools. SWIFT facilitates transactions with more than 11,000 banks and financial institutions in over 200 countries, and the exclusion of Russia from the international financial system is estimated to shrink the Russian economy by five per cent. The French finance minister memorable described the measure as a financial nuclear weapon. Japan has also decided to block seven major Russian banks from the SWIFT system. In addition to the SWIFT ban, Russia’s economy has been hit by major credit card companies, such as VISA, Master, American Express, and JCB deciding to halt their services in the country.
It has been observed that Russia has attempted to evade sanctions by utilizing cryptocurrency as a loophole. In response, Japan, the United States, and European countries have rushed to crack down on cryptocurrency transactions by Russian users. The Japan Virtual and Crypto Assets Exchange Association (JVCEA) has discussed and considered specific measures against cryptocurrency transactions by Russia. On March 4, 2022, Japanese Finance Minister Suzuki Shunichi referred to the financial messaging system of the Bank of Russia (SPFS) as an equivalent to SWIFT and stated at the Diet that “We are closely watching the situations of settlements such as crypto assets and SPFS in order to secure the effectiveness of sanctions against Russia.” At the same time, however, digital currency has contributed to financing humanitarian aid projects in Ukraine. Since cryptocurrency can be operated internationally and instantly, Kyiv has been able to draw upon cryptocurrency donations to procure aid for civilians.
Meanwhile, it has been pointed out that China can bypass the SWIFT system and that Chinese digital currency could see a boost resulting from the war and Western sanctions against Russia. China has created and promoted its CBDC, the digital yuan, which is not linked to the existing global financial system dominated by the US dollar. In order to promote the digital yuan, China declared all cryptocurrency payments and services in the country illegal in September 2021. China has launched a smartphone application for payments and money transfers based on the digital yuan, which is currently available in 12 cities and regions including Shenzhen, Suzhou, Chengdu, Shanghai, and Beijing. China’s digital strategy has been linked to the Belt and Road Initiative (BRI) as well as its strategic vision to create the so-called Digital Silk Road (DSR) by anchoring its digital infrastructure in the geopolitical sphere. As a result, the digital yuan has strategic implications for the Indo-Pacific security environment.
BOJ Governor Kuroda Haruhiko stated at the Budget Committee of the House of Representatives on January 28, 2022, that Japan would be able to judge whether the country can officially introduce its CBDC by 2026. It will take time for the BOJ to identify and mitigate potential drawbacks of the introduction of CBDC, but the current state of the geopolitical economy in the Indo-Pacific, characterized by an accelerating rivalry between the US and China, indicates a need for an early introduction of Japanese digital yen. As the world’s third-largest economy, Japan has an important role to play in strengthening effective multilateral cooperation in response to the ongoing war in Ukraine. Tokyo can do a lot to help coordinate effective digitalized economic sanctions against Russia which are geared towards de-escalation and the early termination of hostilities. The impact of the war is already being felt, with the fluctuation of cryptocurrency, and secondary effects including higher oil prices, impacting not only the economy of Japan but that of an increasingly interconnected and digitalized world economy.