December 4, 2023

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Breaking Japan’s Cash Habit by Nudging Wage Earners


If supply of alternative payment options could whip up its own demand, Japan would be near-cashless by now. Since that’s far from reality, the government is giving people a helpful nudge, prompting them to use their mobile wallets more often than their physical ones.

The Japanese preference for cash is well-known. The surprise is that it refuses to die despite an abundance of other choices. In addition to credit and debit cards — and their digital versions — most large retailers now accept at least half a dozen QR code-based services. For small-value purchases at the corner store, transport providers’ stored-value cards and their mobile-app avatars are a popular substitute for yen banknotes.

Yet, two-thirds of all transactions last year involved currency, which is costly for Japan’s banks and a drag on its economy. A country where the working-age population has shrunk 14% over the past quarter century is loath to deploy labor in low-productivity activities such as filling up ATMs and collecting notes and coins from businesses. 

Which is why the labor ministry is lifting its ban on e-money salary payments. The public and private sector employees who agree to receive a part of their wages virtually will be allowed to hold up to 1 million yen ($6,800) in their digital salary wallets. If an online operator goes bankrupt, this balance will be refunded to the consumer. With that guarantee, which mimics the 10 million yen public deposit insurance in the event of a bank failure, labor unions have given their backing to the plan, ending a debate that began in 2020.

It’s a major win for the government as well as for the likes of PayPay and Line Pay, both backed by SoftBank Group Corp., and Rakuten Pay, promoted by the local e-commerce giant Rakuten Group Inc. And it could be just what Japan needs to get into the habit of spending virtually. 

In the space of just a few years, the array of cashless payment options has exploded. QR code is the fastest-growing non-cash system, thanks to near-zero setup costs for merchants and heavy promotion by firms such as SoftBank. 

Masayoshi Son’s firm spent heavily on PayPay, signing up customers with generous discounts, and making it free for merchants to accept payments for the first several years. That investment has paid off, with PayPay controlling 45% of the QR code payment market, according to market researcher MMD Labo. It boasts 51 million registered users — or around half the adult population.

E-commerce and telecom players are also looking to keep users spending within their expanding networks. Rakuten, which already offers 70-plus services, recently added investments with e-money to the menu. It has around 17% of the QR code payment market, with Nippon Telegraph & Telephone Corp.’s mobile operator Docomo and rival KDDI Corp.’s AU holding similar shares. Mercari Inc., a flea-market app operator that’s one of the few Japanese startups to make a dent in the US, has 3%. 

In terms of penetration and ease of use, contactless mobile transit cards issued by rail networks are second to none. The arrival of East Japan Railway Co.’s Suica on Apple Inc.’s iPhones in 2016 was an inflection point. But in truth, the rail firms should have pounced on their first-mover advantage much earlier: Despite launching mobile options before smartphones, they put in little effort to build out payment networks. Initial standards lacked interoperability between regions, and the point-of-service technology was expensive for merchants. 

Still, Suica and other rail cards remain the best alternative for foreigners as prepaid charge options that can be added to any smartphone. The contactless credit cards that visitors might be familiar with elsewhere have yet to reach true penetration, with the waters muddied by NFC standards such as the Quicpay and iD that exist alongside choices like Visa Inc.’s Visa Touch. 

It’s all a bit of a mess. The bewildering array of payment methods may also be resulting in decision paralysis for less tech-savvy users — cash is accepted everywhere after all. Many merchants, especially smaller eateries, would see their minuscule profit margin swallowed by the charge for cashless payments. Others want to keep their transactions off the books in case the taxman arrives. 

That’s one reason the government is betting on digital salaries, the first big change in decades in the mode of worker remuneration. Japan’s Labor Standards Act directs employers to pay all wages in cash. An exception was made in 1975, when bank transfers were permitted, and again in 1998, when employers were allowed to credit employees’ brokerage accounts.

Now, a new set of challengers will get a foot in the door. Fund-transfer apps will soak up some of the excess deposits at Japanese lenders, which have billions of dollars parked with the Bank of Japan at negative interest rates. The policy goal of raising cashless payments to 40% by 2025 — and 80% in the long run — will have a shot if purchasing power lands up on a phone by default. E-wallets will be closer to spending avenues than deposits that have to be first withdrawn at ATMs. “Many people will likely choose to receive a portion of their wages via their digital wallet for daily purchases and other transactions, while the rest of their salary will be received through a more traditional bank account,” a Rakuten spokesperson told us. With e-money providers already offering savings products, even the securities business may witness a digital tilt. 

From bullet trains to smart toilets, life in Asia’s second-biggest economy is replete with marvels of modern technology. But when it comes to money, the Japanese are staunch traditionalists. Even the pandemic, when people everywhere were fearful of touching money, hasn’t tipped the balance. Long after it went out of fashion in neighboring China and South Korea, cash remains the dominant medium of exchange. But when wages start appearing in digital wallets, the sclerotic pace of change could finally pick up pace.

More From Bloomberg Opinion:

• Cash-Loving Japan Could Warm Up to Crypto: Andy Mukherjee

• Better to Flip Burgers Than Work at a Megabank: Gearoid Reidy

• HSBC’s New CFO Needs to Clear the Gloom: Paul J. Davies

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia. Previously, he worked for Reuters, the Straits Times and Bloomberg News.

Gearoid Reidy is a Bloomberg Opinion columnist covering Japan and the Koreas. He previously led the breaking news team in North Asia, and was the Tokyo deputy bureau chief.

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