On December 27, 2024, at 8:00 AM UTC+8, Japan's "Digital Yen" introduced a design that calculates interest based on the current deposit rate during the third phase of central bank testing, attracting significant attention from global currency markets and the banking industry. This change marks a new phase in Japan's exploration of CBDC, transitioning from simple payment trials to a linkage of "currency form + interest mechanism," leading to a reassessment of the liability structure and deposit competition landscape for traditional commercial banks.

Key Information on the Interest-Bearing Digital Yen Pilot

● Pilot Progress and Timeline: After completing the second phase of CBDC functional testing in 2023, the Bank of Japan (BOJ) officially entered the "third phase" of practical scenario testing in 2024, with interest calculation seen as one of the core incremental functions.
● Interest Calculation Setting: According to the briefing, the digital yen in this round of testing adopts the setting of "interest calculated based on the current deposit rate," anchoring the interest rate level to the existing yen current deposit rate, without involving higher or tiered rates, aiming to avoid its evolution into a high-yield tool.
● Positioned as a Payment and Settlement Tool: Japanese officials have repeatedly emphasized that the primary goal of the digital yen is to enhance retail payment efficiency and ensure the resilience of the payment system, rather than creating a new high-interest asset class. This interest setting leans more towards "functional equivalence," maintaining consistency with the monetary attributes of bank current deposits.
● Avoiding Escalation of Interest Rate Competition: The briefing notes that the Bank of Japan deliberately avoided "excessive rates" or "tiered rates" in the design to prevent triggering a severe impact on the liability costs of commercial banks; thus, this interest calculation resembles "small-step alignment," not "strong stimulus."
● Limited to Small-Scale Technical-Institutional Testing: The interest-bearing digital yen remains in a closed or semi-closed testing environment, primarily involving certain financial institutions and controlled user groups, and has not been fully opened to the general public. The official has also not provided a specific timeline for comprehensive implementation.

Direct Impact on the Liability Side of Japanese Commercial Banks

● Direct "Benchmarking" of Current Deposits:
● The digital yen aligns closely with bank current deposits in terms of interest rates but has advantages in settlement efficiency, security, and official credit endorsement, forming a direct substitute for traditional current deposits.
● In Japan's long-term low-interest or even negative interest rate environment, banks primarily rely on "account stickiness" and payment functionality to attract current deposits, where the digital yen has potential advantages in both areas.

● Pressure on Bank Liability Costs and Structure:
● The briefing emphasizes that if the digital yen is widely promoted based on interest calculation, residents and businesses may shift some liquidity from bank accounts to digital yen wallets, thereby compressing the scale of bank on-balance-sheet current deposits.
● To retain deposits, banks may be forced to:
● Raise interest rates on certain current or notice deposits;
● Launch account and wealth management products linked to the digital yen;
● Strengthen payment scenario services and value-added functions to offset the disadvantage of "non-comparable interest rates" with "service value."

● Particularly Vulnerable Small and Medium Banks:
● Large banks can still maintain a certain deposit base in the short term due to comprehensive financial services and brand advantages;
● Local banks and small institutions are at a disadvantage in terms of digital capabilities and product diversity, making them more likely to be the first to suffer from the migration of residents' current deposits.

● Potential Increase in Dependence on Interbank and Wholesale Funding:
● Once the retail deposit base is eroded, commercial banks may increase their reliance on interbank borrowing, wholesale deposits, and bond financing.
● The briefing warns that this will raise the overall liability costs for banks and amplify liquidity risk transmission, making it easier to form an unstable combination of "rising funding prices + term mismatches" under stress scenarios.

Policy Intentions and Institutional Safety Valves of the Bank of Japan

● Core Intent: Maintain Monetary Policy Transmission and Payment Security:
● The briefing repeatedly points out that the primary goal of the Bank of Japan's digital yen layout is to ensure that the retail payment system serves as a "last line of defense" in extreme situations, such as large-scale system failures, natural disasters, or geopolitical risks that disrupt traditional network payments.
● The introduction of the interest-bearing function aims to align the monetary attributes with bank deposits, preventing the digital yen from being simply viewed as a "prepaid card" or "purely technical wallet," to better connect with the existing monetary policy framework.

● Strictly Setting Scale and Scenario "Braking Devices":
● The briefing emphasizes that the Bank of Japan has preset multiple restrictive tools in the design:
● Constraints on the upper limit of individual wallet holdings and transaction limits;
● Distinguishing between daily payment balances and large-value savings to avoid large-scale migration of residents' savings to the digital yen;
● Binding it to commercial bank accounts to strengthen the synergy between the digital yen and the banking system rather than creating antagonism.

● Not Pursuing "Siphoning Off Bank Deposits":
● The briefing clearly states that the Bank of Japan has repeatedly emphasized in policy communications that it "will not replace bank deposits with CBDC" and cautiously avoids any wording that could be interpreted as "official competition with commercial banks for liabilities."
● In the design of the interest rate structure, it adheres to "interest calculated based on the current deposit rate, but not exceeding the overall level of bank deposits," aiming to weaken its asset attractiveness and lock it in as a "payment tool" rather than a "wealth management tool."

● Maintaining a Symbiotic Relationship through Commercial Bank Participation Mechanisms:
● The digital yen ecosystem is not a single-layer structure of "central bank directly connecting to end users," but rather connects through commercial banks and payment institutions as operational intermediaries.
● This means that banks will still control important customer interfaces, compliance reviews, user operations, and scenario services, thereby retaining commercial value and bargaining power in the new system.

Comparison and Differences with Global CBDC Progress

● Path Differences with China and Europe:
● The briefing compares Japan's digital yen with CBDC pilots in other major economies:
● China's digital currency project significantly leads in scenario and pilot city coverage, emphasizing high-frequency retail payments and government livelihood scenarios;
● Europe emphasizes privacy layering and offline payment functions in the digital euro;
● Japan has been relatively cautious in the early stages, only starting small-step tests on sensitive mechanisms like interest calculation in the third phase.

● Japan's "Latecomer-Cautious" Strategy:
● Compared to some leading countries, the Bank of Japan has chosen a clear "latecomer advantage" strategy in the CBDC project: first observing international practices and technological paths, then gradually filling gaps through limited functional pilots.
● The briefing points out that Japan is particularly focused on:
● How to promote CBDC without disrupting the bank credit creation mechanism;
● How to design a more acceptable digital form in a society characterized by extremely low interest rates, an aging population, and a strong preference for cash.

● Cross-Border and Regional Cooperation Currently Remains a Secondary Direction:
● Although G20 and BIS frameworks have been promoting cross-border collaboration on CBDC, the briefing shows that Japan's digital yen currently focuses mainly on domestic retail scenarios and financial stability issues.
● Cross-border payments and multilateral interoperability are seen as "potential for subsequent phases," but have not dominated this round of interest-bearing pilot.

Bullish and Bearish Views: Is the Digital Yen a Threat to Banks or a New Infrastructure?

● Optimistic/Supporters: Viewing it as a Catalyst for Payment System Upgrade and Bank Transformation
● They believe that the interest-bearing digital yen is a "technological upgrade" to the existing yen system rather than a replacement, which in the long run will help:
● Strengthen the resilience of the Japanese financial system in extreme situations;
● Reduce retail payment and settlement costs, improving transaction transparency and traceability;
● Force commercial banks to accelerate digital transformation, optimize online services, open APIs, and collaborate on scenarios to enhance comprehensive service capabilities.
● Some supporters argue that, under the premise of strict anchoring of interest rates and the existence of balance limits, the erosion of bank liabilities is a "controllable gradual process" that will not trigger systemic runs.

● Pessimistic/Opponents: Concerned About Commercial Banks Being "Hollowed Out" of Basic Deposits
● Critics argue that once residents become accustomed to using a digital currency directly backed by the central bank and with interest-bearing attributes, it will inevitably squeeze commercial banks' current deposits:
● In the long term, the low-cost funding sources for banks will be eroded, further compressing net interest margin space;
● The ability of banks to support credit to the real economy may be limited, with rising financing costs transmitted to businesses and households.
● There are also concerns that in a crisis scenario, the digital yen could amplify "digital runs":
● Users may quickly transfer large amounts of deposits from commercial banks to digital yen wallets;
● Even if there are usual balance limits, extreme conditions may force policy adjustments, causing a chain reaction of "unstable expectations + accelerated runs."

Subsequent Observations and Potential Evolution Directions

The pilot of the digital yen calculating interest based on the current deposit rate is not an isolated technical experiment but an institutional-level exploration of the question of "how central bank digital currency can coexist with commercial banks" against the backdrop of Japan's long-term ultra-low interest rates, pressure on bank profitability, and global CBDC competition. It attempts to find a delicate balance between improving payment efficiency and financial stability through deliberately conservative interest settings and balance limits. In the short term, the market will focus on three key nodes: first, whether the Bank of Japan will disclose more detailed assessments of user behavior and changes in bank liabilities; second, whether it will relax balance limits or expand scenarios in the next phase of the pilot, especially in cross-border and merchant-side settlements; third, how commercial banks will adjust their products and services to incorporate the digital yen into their ecosystems rather than simply viewing it as a competitor. The real test lies not in whether the technology can be implemented, but in whether the institutional design is sufficient to lock in the "payment tool" positioning and avoid its evolution into a strong disruptive variable reshaping the liability structure of the banking system.

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