In Japan, the percentage of transactions in which cash alternatives are used for payment (i.e. cashless payments) is slightly under 20%, yet the Japanese government is aiming to raise this to 40% by the year 2025.
The Costs of Using Cash Are High
In some senses, the use of cash is inefficient and carries a variety costs, including the costs of its manufacturing and distribution, the costs required for security, the time needed for ATM withdrawals, and the diminishment of tax revenues due to tax evasion. For this reason, promoting the digitalization of currencies will allow many Japanese individuals and corporations to be free of the relatively high payment costs they currently face compared to those in various foreign countries. In addition, the digitalization of familiar currencies will help enhance the IT literacy of a great many people, and the digitalization of the economy as a whole could even help the use of digital currencies catch on. This development would also lead in turn to the greater efficiency of the overall economy.
The first thing one thinks of when it comes to digital currencies is virtual currencies such as Bitcoin. Sales of Bitcoin as an investment vehicle have soared, but its use as a method of payment—as was originally hoped—remains limited. This is because its volatile price fluctuations have presented a major impediment to its widespread adoption. In the future, a precipitous price drop could deprive it of nearly all credibility not only as an investment vehicle, but also as a payment method.
The Spread of Smartphone-Based Payments
Meanwhile, internet businesses like Rakuten, LINE, and Yahoo are working to expand the use of smartphone-based payments. By providing commission-free service not only to users but also to stores themselves, these enterprises are seeking to broadly popularize smartphone-based payment methods. Because these kinds of internet businesses operate on a business model that entails earning profits from advertising revenues, the potential exists for eliminating payment service fees. Banks are also looking to capitalize on the smartphone-based payment trend, but since they have only operated under business models in which payment services depend on fee revenues, this transition would be a rather tough sell.
The spread of smartphone-based payments by internet businesses and other enterprises would lead to a certain drop in payments made through bank deposits. For banks, this would result in a significant loss in revenues. In an effort to recover these losses, banks are seeking to get on board with their own smartphone-based payment services, but this would not change the fact that their existing revenues from payment fees will ultimately take a hit.
Thus, for banks, getting involved in smartphone-based payment services will split up their revenue bases, and so banks are facing a major paradox. For this and other reasons, it would appear difficult for banks to invest their full resources in this field all at once.
The Japanese Government and the Bank of Japan Must Lead the Charge Toward a Cashless Society
Japan’s transformation into a cashless society is being spearheaded by private businesses, with the government providing ancillary support. However, I believe it will become necessary for either the government or the Bank of Japan (BOJ) to take the lead here in promoting the switch to a cashless system. Achieving a cashless system as an element of social infrastructure requires the construction of an environment in which everyone can make use of smartphone-based payments, for example. People who are unable to obtain smartphones or other payment devices on their own for economic or other reasons will require assistance as well, from the perspective of social welfare. That would be difficult for private businesses to accomplish.
Moreover, there is a growing unease in Japan over not just digital currencies, but also the use of the internet and other forms of IT. Safety concerns such as internet fraud and fears about the leaking or misappropriation of personal information have become serious impediments to digitalization. In the first place, these problems should be overcome with cooperation from private enterprises, but doing so will require a significant amount of time. In Japan, where trust in the public sector runs deep, solutions spearheaded by the government or the BOJ would conceivably be more effective and realistic as a means of assuaging people’s concerns.
There is also the problem of IT literacy. A precondition for the spread of digital currencies is that people acquire a minimum level of IT skills, so that IT literacy becomes widespread in society, but that is not the current situation in Japan. IT skills here are not necessarily higher than those in other countries, and more than a few people are lacking in IT literacy, especially among the elderly population. The only way to improve these circumstances is through providing various educational opportunities, yet even in this regard, the public sector has a vital role to play.
The longer we wait to digitalize our currency, the more likely it will also be that an ever-growing gulf will separate Japan from the rest of the world in overall economic digitalization. To prevent Japan from getting left behind by the global digital revolution, it’s vital for the BOJ and the Japanese government to show the people their resolve to take the lead role in digitalizing our currency, and to begin earnest discussions toward having the BOJ issue its own digital currency.
Nomura Research Institute, Ltd.
Corporate Communications Department