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Fearing Chinese advantage, Japan lurches towards digital currency and electronic payments

9 Comments
By Luke Mahoney, grape Japan

As we’ve discussed before, Japan is largely a cash based society. Despite, at times, a healthy interest in digital cryptocurrencies like bitcoin, consumers rely heavily on physical currency while eschewing electronic payment methods. This is somewhat counter-intuitive, as the country has one of the most advanced regulatory environments in the world with regard to digital assets.

Either way, it’s indisputable that consumers prefer traditional forms of transacting. Checking accounts are virtually non-existent in the land of the rising sun, so cutting a check is rare. Credit cards, on the other, are widely available. Yet, consumers’ frugal attitudes result in limited use.

Indeed, use of credit cards account for some 17 percent of transactions. Compare this to 21 percent in America where consumers also rely heavily on other electronic payments. Moreover, the cash in circulation in Japan accounts for 20 percent of GDP, while physical tender accounts for 8.3 and 9.5 percent in the U.S. and China, respectively.

Still, Japan’s massive debt-load implies problems for the yen going forward. Currently, debt in the country accounts for 237 percent of GDP, the largest in the world. Historically, such an excessive debt-to-GDP ratio implies a high risk of default and a weak demand for a government’s bonds. According to Luke Gromen of FFTT research firm, 50 of 51 countries to ever reach a debt-to-GDP ratio above 130 percent have defaulted, Japan being the sole exception. When a developed country defaults, it typically inflates away its outstanding obligations by weakening its currency. If Japan were to succumb to this fate, it implies a tumultuous time for the yen.

A Cashless Society

Since late July, a team of about 10 members at the Bank of Japan (BOJ) have been working towards the development of a central bank digital currency (CBDC), a digitized version of the yen. Such a currency may rely on the cutting-edge blockchain technology that powers cryptocurrencies like bitcoin; however, this remains uncertain. The BOJ hopes that the new technology will be universally used even during natural disasters and power outages.

According to Takeshi Kimura, the BOJ’s department director-general, development is a top priority. He recently told the Asahi Shimbun, “We will move forward with discussions while pushing up the level of consideration beyond the preparatory stage.” Although Kimura noted that the CBDC will replace cash and force the consolidation of other electronic payments, he did not provide a timeline for the rollout.

Highlighting the government’s urgency, the BOJ recently appointed top economist Kazushige Kamiyama to head its payments and settlement department which oversees digital currencies. Kamiyama previously directed the use of big data in analyzing the effects of COVID-19 on the economy. As Japan drastically trails South Korea and China in digital payments, the move likely marks an acceleration of the program.

A Currency Race

Nevertheless, in a country that relies on cash for 80 percent of transactions, what motivates the sudden rush to go cashless? Competition in a post-COVID world is likely key.

The economic implications of the ongoing pandemic are vast, with numerous economists and analysts suggesting a slowdown in global productivity. American multinational investment bank Goldman Sachs recently warned that the U.S. government’s excessive fiscal spending could lead to a severely weakened dollar and its loss of its world reserve currency status. As the global reserve currency, the dollar is the primary currency in which most of the world's trade occurs. Current economic conditions have led world leaders to suggest a “Great Reset” to the global economy.

As China and Russia begin reducing their reliance on the dollar, a shift in the role of global currencies seems increasingly likely. A diminished reliance on global reserve currencies has already been underway since The Great Financial Crisis of 2008-2012.

The possibility of asserting its currency on the international stage has likely pushed China to become a front-runner in the digital currency race. If a digital yuan, currently under trial, were to be widely accepted it could streamline commerce and increase financial inclusion. Yet, the CCP would enjoy privileged access to transaction data, a valuable commodity in an increasingly digital world. As noted with Facebook’s Libra, the central bank policy of a dominant digital currency could overwhelm that of another nation.

All things considered, it remains uncertain whether China, or any single nation, will realize such influence. As Japan disinvests from China, government officials are unwilling to stomach such a risk. Yet, as the BOJ accelerates the development of a digital yen, it faces an uphill struggle updating the spending habits of an aging and cash-dependent society.

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© grape Japan

©2020 GPlusMedia Inc.

9 Comments
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Thank you Desert Tortoise, I´m going to read the book , you recomend. it is interesting to return to paper money. Do you think is going to live together the paper money & digital money? Or is going to be like in China?

Thank you!!

Love & xxx

0 ( +0 / -0 )

I get the idea of paying bills electronically. Do it myself. It is one of the reasons the US Postal Service has seen reduced revenue in recent years. However, the idea of digital currency escapes me. Haven't got a clue what they are talking about.

-1 ( +0 / -1 )

No cash no Freedom. Digital money is control. Yes to Metallic money! Always

Since the Industrial Revolution, specie (metal) currencies have failed every time they were tried. The short story is since they have uses beyond being a currency their value fluctuates with demand. Often the metal in a coin is worth more in some other commercial use than the face value of the coin and the coins simply disappear, melted down to be used somewhere where they have greater value. Since the value fluctuates often widely over time, they make a poor store of value and make it hard for businesses to plan. If the value of the metal dives so does your business balance. Not a good thing. Coins can be shaved and adulterated in a variety of ways. They are hard to carry and use and their greatest failure since the age of industrialization is one cannot mine the metal and grow a metal based currency fast enough to support economic growth. For thousands of years each generation did pretty much the same work as the previous generation. Very little changed. Then suddenly along came the industrial revolution and suddenly humans made vast quantities of goods, more than ever before but a money supply composed of precious metals could never grow in kind. Advances in agriculture meant where in days of old one farmer could support at most one family today a farmer can grow enough food for fifty families. Banks make loans on paper and that paper instantly becomes currency. That has always been the downfall of specie money and why nations always end up reverting to a centrally managed paper currency. Read a good and very short book by John Kenneth Galbraith called "Money, Whence it Came, Where it Went" for a more complete understand of the history of specie money and why it fails in a modern economy.

-1 ( +0 / -1 )

t's actually good for us, because we can send money abroad without relaying on the expensive SWIFT system of the traditional banks.

It's very bad for Japan, lots of dividends are gonna fly abroad.

What does a digital currency accomplish that a currency like the Yen or US Dollar doesn't do now? I routinely buy things directly from Japanese merchants from home in the US and the transactions happen as fast as I can type the keys. I pay for shipping and the product arrives at my home. What else does a digital currency do? As far as I can tell, and somebody correct me please, the attraction of a digital currency is one may theoretically conduct illegal transactions without alerting the authorities, and it appeals to people who want to pretend they are not relying on their societies institutions or the protections of the law to do things.

0 ( +1 / -1 )

What they trying to make is called stablecoin.

To buy stablecoins is an intermediary step to get Bitcoins cheaper.

It's actually good for us, because we can send money abroad without relaying on the expensive SWIFT system of the traditional banks.

It's very bad for Japan, lots of dividends are gonna fly abroad.

0 ( +0 / -0 )

Its not about competition, it's about the control and tracing of digital currency

1 ( +1 / -0 )

No cash no Freedom. Digital money is control. Yes to Metallic money! Always

3 ( +3 / -0 )

Still, Japan’s massive debt-load implies problems for the yen going forward. Currently, debt in the country accounts for 237 percent of GDP, the largest in the world.

Yet, Japan is the largest creditor nation and the number 1 buyer of US bonds.

3 ( +3 / -0 )

 it’s indisputable that consumers prefer traditional forms of transacting.

That's clearly "disputable" whether it's a "preference." Until quite recently, it was difficult/impossible to use a credit card in Japan. I remember having to rush out to ATMs, because some restaurants would only accept cash or some obscure and limited card.

Softbank refused to issue me a receipt for a phone I purchased because I paid the 50,000 yen with a card rather than in cash. In this kind of environment, consumers will "prefer" cash simply to avoid such hassles. Cashless payments tend to take off once the right environment is set up, and Japan is now making the steps, which nearly all other countries made many years ago.

4 ( +4 / -0 )

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