Japan is one of the countries with the highest levels of cash in circulation in relation to GDP in the world, with a ratio exceeding 20%, compared to 8% in the United States or 11% in the euro area. In value terms, banknotes in circulation have doubled between 2000 and 2019; however, the highest denomination, the 10,000 Yen note, represents 90% of cash in circulation indicating that cash is an important store of value. According to Reuters, Japanese households hold over half of their assets in cash and deposits.
A ¥280 billion program to incentivise digital payments
In 2017, the Ministry of Economy, Trade and Industry (METI) published a policy document titled “Cashless Vision” which set a target to double the share of digital payments from 18% in 2017 to 40% in 2027. In October 2019, the Japanese government raised the sales tax from 8 to 10% and saw this as an opportunity to promote the adoption of digital payments. To offset the impact of the tax hike and promote digital payments, the government has launched a 9-month reward programme whereby consumers receive a 2 to 5% rebate if they use one of 40 approved digital payment methods. It does not apply to foreign cards. This represents a massive subsidy of ¥280 billion ($2.5 billion). According to a survey conducted at the end of October, only 20% of respondents said they had either started using or are considering using digital payments following the campaign.
The incentive has represented a huge boost for both traditional electronic payment service providers and fintechs which have aggressively promoted their products. Too aggressively maybe for some. In July 2019, 7Pay, the payment system owned by the Seven-Eleven convenience store chain experienced a major hack leading the company to close the service. Another provider PayPay experienced glitches when it offered one-day incentives of up to 20%, leading to complaints on social media.
A challenge for the elderly and small shops
It is still too early to assess the impact of the government campaign. However, it clearly faces two challenges.
The first is to convince consumers and particularly the elderly. Low interest rates, a dense and efficient ATM network, very low levels of counterfeit notes, al low crime rate and high levels of automation have made cash convenient and appealing. This is particularly true for the elderly who make up almost a third of the population and have little interest in using payment apps or electronic money.
The second is to increase the acceptance of digital payments by small merchants. According to Reuters, “Less than half of some 2 million small firms deemed eligible for subsidies on cashless payments have been registered with the government campaign, due to the cost of introducing machines and high transaction fees.”