The government has increased staff looking into the legal and technical aspects of issuing a central bank digital currency, CBDC, which are digital forms of existing currencies.
The Bank of Japan BOJ may be under pressure to shift away from its cautious, baby-step approach to issuing a digital yen, but the political attention has yet to translate into any other direct investment, analysts say.
Takayuki Kobayashi, a minister of economic security, said we must think about what might happen to Japan's national security if other countries move ahead with CBDC, a role created under Prime Minister Fumio Kishida's administration.
Japan has to speed things up so it's ready to issue a digital yen any time, he said.
China is a global front-runner, and has already run tests in major cities for a possible launch of a digital yuan next year. Japan, along with other G 7 advanced nations, has moved much slower.
The BOJ only started the first phase of its experiment in April, and says it has no immediate plans to issue a digital yen. Pilot programmes, if any, won't take place until 2023 at the earliest.
Kishida has made economic security a policy priority, and framed questions around CBDC beyond finance into one of national security, and that lukewarm stance may be put to test.
While G 7 central banks generally agree on the need to counter China on issues of privacy, the case is particularly strong for Japan as lawmakers worry about the growing economic might of its assertive neighbour.
Some influential ruling party lawmakers view China's advances on CBDC as a potential threat to the dollar's status as a global reserve currency and the financial dominance of Washington-Japanese biggest ally.
A spokesman for Kishida told Reuters Japan must work closely with the United States to counter any attempt to undermine the dollar's reserve-currency status, adding that the BOJ was coordinating with the finance ministry to make sure progress is made for issuing a digital yen.
Opposition parties have called in their platforms to speed up the implementation of CBDC plans.
BOJ officials say that China's plan won't affect the timeframe for their CBDC experiments, as the key purpose of is to provide convenient, efficient payment and settlement means to the public.
Sources familiar with the thinking say that the BOJ's plan is more likely to be affected than China's plan, as it will be how quickly its European and U.S. counterparts announce plans for issuing CBDCs.
The debate over issuing a digital yen could intensify next year as Kishida's administration lays out details of its economic security plans, and China is seen promoting its digital yuan at the Beijing Winter Olympic Games in February.
The administration and his ruling party are keen to issue a digital yen, according to former BOJ board member Takahide Kiuchi, who is currently an economist at Japan's Nomura Research Institute.