Authorities in Japan are considering starting a digital currency to be called the J-Coin. By doing so, Tokyo will reduce cash circulation in the country.

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"The project is in the early stages, and we have just held study meetings with other institutions," a spokesperson for Japanese bank Mizuho Financial Group told CNBC on Wednesday.

"This will be pegged with Japanese Yen, and hopefully used to make payments and transfers through a mobile phone app," the bank said.

According to a report by the Financial Times, a consortium of Japanese banks are working on the project, and they are interested in launching the J-Coin before the Tokyo Olympics in 2020.

The project has the support of the central bank and regulators. The J-Coin will allow Japanese consumers to pay for goods and services with their smartphones.

The government's goal is to cut dependence on cash, which represents 70 percent of all transactions by value in Japan. The J-Coin will be exchanged at a one-to-one rate with the yen.

Banks behind the project intend to counter the growing e-payments services of international tech giants like Apple or Alibaba.

Japan is one of the first countries to begin to recognize cryptocurrency as a legal method of payment. The country passed legislation into law, effective April 1, categorizing digital currency as a kind of prepaid payment instrument.