Japanese policymakers must engage more with platform operators and financial institutions to ensure any plan to issue a digital yen does not crowd out the private sector, a lawmaker overseeing the ruling party's deliberations on digital currencies said.
The Bank of Japan plans to begin experimenting next year with issuing its own digital currency, as other central banks step up the pace of their digital currency development.
With an eye on the rapid progress China is making towards a digital yuan, Japan's ruling Liberal Democratic Party (LDP) has urged the BOJ to speed up the development of a digital yen.
"Japan should seek to maximize the potential a central bank digital currency (CBDC) can offer," Hideki Murai, who oversees the party's project team on digital currencies, told Reuters in an interview on Tuesday.
But CBDC is not the only way to make digital settlements more convenient, he said, stressing that Japan should be open to other means such as enhancing its existing settlements system.
"The key is to ensure CBDC doesn't crowd out private businesses," Murai said, adding the project team's focus next year would be to get private companies more involved.
"It's important for private companies to understand what CBDC means to them, while policymakers must have a deeper understanding on what the private sector is doing," said Murai, a former finance ministry official who has close contacts with incumbent policymakers.
Unlike in China where a handful of operators dominate the market, multiple cashless payment platforms incompatible with each other compete for a small market in Japan, where many people still favor paying in cash.
A digital yen will help standardize digital settlements, but could hamper efforts by private firms already working to build a common settlement infrastructure for digital payments.
Some experts say a convenient, safe digital yen could also unleash an outflow of funds from private deposits.