Japan has a stubbornly intimate relationship with cash. The country remains one of the most cash-based economies in the advanced world. According to Boston Consulting Group, cash accounts for nearly 65 percent of all payments in Japan, which is more than twice the average of 32% among other developed economies.
Japan’s love affair with cash may be perplexing. After all, the country’s long-established status as a world leader in technology conflicts with its tepid transition to plastic and electronic money.
The dominance of cash transactions can be attributed to a series of government policies starting in the late 1990s.
During the fourth quarter of 1995, the Bank of Japan reduced its benchmark interest rate to an unprecedentedly low 0.5 percent. In the next 23 years, Japan’s interest rate would never return to where it had been prior to the rate cut. Many people consequently withdrew their money out of financial institutions because they both feared that banks’ loss of profitability could eventually lead to bankruptcy and realized they would not earn any money storing their savings in a deposit account.
Then in 2015, the Japanese government lowered the inheritance tax threshold, leaving families previously falling below the taxable level subject to inheritance tax. As a result, many of those liable to be taxed converted their assets into cash to evade detection from authorities.
Another law that intensified the turning of assets into cash was the My Number law implemented in January of 2016, which assigned a 12-digit identification number to every Japanese resident. Intended to improve administrative efficiency, the system instead fueled widespread public concern over possible personal information leaks, a sentiment further reinforced by recent data breaches in the country. These developments caused an increase in tansu yokin, or savings in the wardrobe. With the abundance of cash at homes, much of consumer transactions in Japan have been made with cash.
Japan’s love for cash is also partly due to its people’s skepticism of credit cards – Many Japanese people fear inadvertently spending too much money if they use their credit cards. Additionally, many small businesses in Japan refuse cards – both debit and credit cards, to avoid paying processing fees and other forms of bank remittances.
As understandable as Japan’s reasons for excessively using cash sound, the country is in danger of missing out on the benefits of the electronic payments ecosystem.
First and foremost, electronic payments can render consumption more convenient. Not only is a digital payment speedier to process than a cash payment, but carrying loose change can also be burdensome.
Electronic payments can also allow more consumers to participate in the digital economy. Following the advent of the Internet, e-commerce sites have proliferated and flourished to the extent where it has become more difficult to find goods unavailable online than those that are available. As credit card remains the primary payment option on e-commerce sites, cardholders have access to a broad international marketplace that is unavailable to consumers who only use cash.
A wider adoption of digital payments will also increase access to financial resources. With cash, there is a limit in the amount of money people can spend – consumers are restricted to the fund they have in their wallet. They could write a check but sellers may be unenthusiastic about accepting them because of the risk of nonpayment in the future. Digital payments can resolve both of these problems: they provide consumers with all available money or lines of credit and ease sellers’ worries about payment guarantees.
A robust digital payments ecosystem will positively reshape how buyers and sellers interact with each other. Not only are digital transactions more efficient and convenient than cash transactions, but they can also increase consumption. This rise in consumption will in turn increase production, the number of jobs and income. This beneficial economic cycle will ultimately lead to a higher economic growth.
On April 11, 2018, the Japanese government announced that it hopes to increase the share of cashless payments from about 20 percent to 40 percent by 2025 and eventually to 80 percent in the future. Understandably, cashless payments will benefit the Japanese economy by encouraging consumption as well as helping the government collect more tax due to increased transparency. However, if Japan wants to achieve this lofty goal and not lag behind other countries, the Japanese government needs to provide proper funding, training and infrastructural support so that the country can quickly and effectively build up a robust digital payments ecosystem. Japan, it’s time to end your love affair with cash.
Je Hoon Lee is a Bachelor of Arts candidate in the Department of Economics at Dartmouth College and a former exchange student at Keio University.© Japan Today