The Taiwan Banker

Visitors to Japan are often surprised by the Japanese affinity for cash. That preference does not align with Japan's reputation as a technological tour de force. Many visitors assume that the world's third largest economy, known for its bullet trains, robot assistants and futuristic vending machines, would be equally advanced in payments. That's not the case, even in the capital city of Tokyo - the world's largest metropolitan area. Many restaurants and bars there still only accept cash payments. Research by the English-language newspaper The Japan Times has found that only 49,350 stores out of 135,764 on the Tokyo restaurant search site Tabelog accept credit cards. During a visit to a famous unadon (grilled eel over rice) restaurant in Tokyo's historic Asakusa neighborhood, my wife and I paid a lunch bill of ¥10,000 (two set meals + the service charge) in cash. Unlike in Taiwan, grilled eel over rice is considered a true gourmet dish in Japan and is priced accordingly. Luckily, we had come with sufficient paper notes. With its cash preference, Japan is an outlier in Northeast Asia. While about 82% of transactions in Japan are in cash, in China, cash only accounts for 40% of transactions, and just 11% in South Korea. Nevertheless, the Japanese government aims to double cashless payments to 40% by 2027 in a bid to improve the transparency of transactions, make the country more accessible to foreign visitors and reduce unnecessary costs. Nomura Research Institute estimates the costs of producing bills and transporting them exceeds ¥1 trillion (about US$9 billion) annually.In the short term, the Japanese government wants to prepare Japan for the 2020 Olympics, when hundreds of thousands of foreign visitors will visit Tokyo. Many will expect to pay for transactions with credit cards, debit cards or smartphones. If Japan does not reduce cash payments, the country may lose up to ¥1.2 trillion in spending in 2020, according to the Japanese government's Cashless Vision report. Pressure on Japanese merchants is already rising as throngs of Chinese tourists seek to pay for transactions with their smartphones. Cash-only restaurants and shops flummox the Chinese given the prevalence of mobile payments in their home country. The Chinese are Japan's biggest source of foreign visitors - having overtaken South Korea - growing from 1.4 million in 2012 to 8 million in 2018. They're also big spenders, last year dropping a cool $14 billion on their sojourns in the Land of the Rising Sun,The Wall Street Journalnoted in a March report. Money talks: Japanese merchants are gradually adopting China's favored smartphone payments platforms, Alipay and WeChat Pay, to capture that business, the report said.Blockchain nationAt first blush, Japan does not seem on the cusp of an e-payments revolution. After all, the population has had access to credit cards for more than half a century, but remains ambivalent about them. Cash accounts for more than 8 in 10 transactions. That's equivalent to 20% of Japan’s GDP, the highest such ratio in the world, the Bank for International Settlements says. Yet perhaps digital currency would better facilitate Japan's cashless revolution than plastic. After all, Japan has been a virtual currency hub since Bitcoin's birth in 2009. Japanese people were some of the earliest users of the hallowed cryptocurrency. Mt. Gox, the first big crypto exchange, was Japanese. Some independent retailers in Japan have long accepted Bitcoin to attract tech-savvy customers and distinguish themselves from the big chains. At the same time, Japanese regulators have taken a pragmatic approach to blockchain technology. They have focused on integrating it smoothly into Japan's existing financial system, strengthening security measures in response to hacks of crypto exchanges rather than seeking bans as China and South Korea have. Today, Japan is the only major country in the world that recognizes virtual currency as legal tender.Mitsubishi UFJ Financial Group (MUFG), Japan's largest bank, is currently working with the U.S. internet firm Akamai to launch a blockchain-based consumer payment network ahead of the 2020 Tokyo Olympics. The companies say that the system could eventually execute 10 million transactions per second, which would make it the world's fastest consumer payment system. In addition to being ultra fast, the system will be more energy and cost efficient than a public blockchain and thus able to accommodate payments typically too small for a traditional credit card network, according to a January report in MIT Technology Review. In March, Japanese media reported that East Japan Railway Company (JR East) might permit subway riders to pay with virtual currencies. Reportedly, JR East and IIJ, a cloud and internet service provider, are discussing how to integrate Bitcoin and other digital currencies into the national contactless public transport card, the Suica. Also in March, Japan's Mizuho Financial Group launched its long-awaited e-wallet, the J-Coin, for digital payments and remittances. Mizuho aims to sign up 6.5 million users and 300,000 participating retail outlets over the next few years. The J-coin was erroneously reported to be a cryptocurrency until Quartz published a report refuting that rumor. In fact, J-Coin uses QR codes to process smartphone payments, like China's Alipay and WeChat Pay. The bank, Quartz says, "claims it had always planned to build a QR-code payment system rather than a standalone digital currency."Slow and steady Despite a steady increase in cash-free transactions, Japan remains far from its goal of 40% non-cash payments by 2025. A January report in the English-language Tokyo Review notes that growth has slowed in the past few years. For instance, in 2017, e-money transactions reached ¥5.2 trillion, up just 1.1% over a year earlier. By comparison, growth in the preceding two years was much brisker - 10.8% in 2016 and 15.7% in 2015, the report says. One reason for the slackening growth in cashless payments could be a surplus of poorly differentiated platforms. Japan's digital wallet providers includes Line Pay, PayPay (a mobile payment firm jointly operated by SoftBank Group Corp. and Yahoo Japan), and Apple Pay as well as convenience store chain Family Mart, e-commerce giant Rakuten and online flea market app Mercari, to name a few. Some of the e-wallets use QR codes while others are equipped with near-field communication (NFC) technology. None stands out as particularly exceptional. Overabundance of e-wallets is hardly a problem unique to Japan - it's an issue in Taiwan and Singapore as well - but Japanese people are more attached to cash than most of their counterparts in Asia. Sowing confusion among Japanese consumers with myriad e-wallet systems and technologies isn't likely to persuade them to give up cash, notes a January report in the English-langauge Tokyo Review. Nor are merchants keen to invest in new hardware and staff training every time a new e-wallet is launched. In a February report, Nikkei Asian Review notes that the Japanese government is rolling out a series of new incentives this year to boost cashless payments. Those include allowing firms to pay their employees with mobile money, increasing use of debit cards (which make up just 0.4% of Japan's payments total) and supporting cashier-free stores that feature cashless payment systems. Most importantly, Japan plans to offer incentives of up to 5% of purchases at certain retailers to offset the effect of a consumption tax increase (it will rise to 10% from the current 8%) set to take effect in October. Yoshio Fukuda of Japan's Payments Association, which supports cashless infrastructure in Japan, told Nikkei that the incentive has sparked interest among small retailers in implementing cashless payment systems. To be sure, incentives will help boost cashless payments in Japan, but perhaps less quickly than the government would like. As The Journalarticle points out, the Japanese worry about how e-payments could compromise their data privacy. That's especially true when Chinese e-wallet providers are involved. Mizuho Financial Group, for instance, is cooperating with Alipay and UnionPay on a payment app. The burden is on Mizuho to pursuade its customers that their data will remain secure - and not end up in the hands of the Chinese government. Overall, however, cash remains popular in Japan for cultural reasons. Low crime rates mean that citizens can feel safe carrying large amounts of cash on their persons. Counterfeit bills are rare in Japan. At the same time, there is a ritualistic quality to cash transactions in Japan, as retailers accept payment on a tray and return bills and coins to customers inside a small envelope, bowing gracefully. Putting a credit card on the tray or swiping a mobile phone doesn't quite feel the same. And Japan has one of the world's oldest populations - 25% of its 128 million people are over 65. They tend to be most comfortable with cash.Broadly speaking, the Japanese have a fondness for physical items, whether currency, newspapers (the Yomiuri Shimbun is the most circulated newspaper in the world) or even compact discs and vinyl records, which account for about 75% of music sales in Japan, compared to about 39% globally. Indeed, the Japanese have been less quick to digitalize than other people, perhaps recognizing that tangible objects hold some intangible charms. With that in mind, cash should be around in Japan for generations to come.