In Japan, the world’s third-largest economy, cash is losing its cachet as king due to its shift towards cashless payments, which more than doubled over the last decade, totalling 36% last year, according to the Japanese Ministry of Economy, Trade and Industry (METI).

A record 111 trillion yen (US$830 billion) worth of cashless payments were made in Japan in 2022, up from 95 trillion yen in 2021. That’s an increase of 17% from the previous year and marks the first time Japan has crossed the 100 trillion yen threshold, as per the economic ministry in Japan.

The Japanese government is pushing to transition from a cash dominated society to a digital transactions-driven economy. In this connection, Tokyo is working to promote cashless payments to account for at least 40% of all transactions by 2025 and to 80% in the long run.  

Home to the fourth-largest ecommerce market in the world that is also among the fastest-growing globally, boosted by a high internet penetration rate (93%), a highly urbanised population (92%), the country’s remarkable literacy rate (99%), and an advanced and well-diversified service and manufacturing economy, Japan’s recent digitalisation push across all industries backed by strong government support is expected to further propel the nation’s ecommerce and digital payments market.   

Factors that have spurred the adoption of digital payments in Japan

The primary factors that have sparked a significant acceleration of digital payments in Japan are as follows:

• In the wake of a consumption tax hike in 2019, the Japanese government introduced a unique programme designed to incentivise the switch from cash to cashless payments. Under the programme, citizens who used cashless payments at specified outlets received cash back or reward points worth up to 5% of the value of those transactions. This programme, which lasted until June 2020, was fairly successful in increasing the share of cashless payments in the country.
• From 2020 onwards, the COVID-19 pandemic fueled a dramatic growth in cashless payments (mobile payments and contactless payments), prompted by the stay-at-home trend.
• In recent years, Japanese consumers penchant for convenience has propelled the meteoric adoption and usage of digital wallets. Research by Market Value Insights indicates that the digital wallets market has crossed over $12 Billion in 2022 and is projected to record more than 16.5% growth rate from 2023–2032, reaching a valuation of approximately $55 billion by the end of the forecast period. Digital wallets introduced as an alternative to conventional payments systems in Japan have seamlessly integrated into everyday life in its drive towards a high-tech future.
• On April 1, 2023, the Japanese government lifted a ban on digital salary payments. This allows companies in Japan to pay salaries digitally – without going through bank accounts, i.e. transferring salaries directly to their employees’ smartphone payment applications instead of moving funds into their traditional bank accounts. This is another step in the Japanese government’s endeavour to move the nation towards a cashless society.
• Japan’s robust and secure payments infrastructure has opened up more digital monetisation opportunities for companies operating in the country.
• The embracing of alternative digital currencies in Japan, with cryptocurrencies being the most in demand, and advancement to the pilot stage for a digital yen (its central bank digital currency) have added to the Japanese government’s momentum to shake off cash and spur digital payments.   
• The proliferation of the business-to-business (B2B) ecommerce industry in Japan over the past few years, which in 2022, was worth over $2.64 trillion, as per METI (Japan).

Japan digital payments: transaction value and CAGR

According to Statista, the total transaction value in the global digital payments market is projected to reach US$9 trillion in 2023. Of this, the Japanese digital payments market is expected to account for a total transaction value of $350.60 billion.

Between 2023 and 2027, the compound annual growth rate (CAGR) for the total transaction value of digital payments worldwide is predicted to be 14.66%, resulting in an estimated total amount of $15 trillion. Within the same period, the total transaction value of Japanese digital payments is projected to experience a CAGR of 14.89%, leading to an estimated total of $610.80 billion, as per Statista.

Key digital payments segments: digital commerce, mobile payments and digital remittances

Statista findings indicate that the Chinese digital payments market is primarily driven by two segments – first, digital commerce (consumer payments for products and services over the internet) and second, mobile point of sale (POS) payments via smartphone applications. The third segment, digital remittances, encompassing online cross-border payments, holds a relatively smaller portion of the market share.

Based on Statista research, digital commerce is taking the lead in the digital payments market segment, with an estimated total transaction value of $296.60 billion in 2023, followed by mobile POS payments ($52.23 billion) and digital remittances ($1.76 billion).

Source: Bank of Japan and Mordor Intelligence

The dominant digital payment methods in Japan are credit cards, electronic money or e-money (prepaid cashless payment), direct debit (Kouza Furikae and Jidou Furikae are the two major direct debit payment systems), and QR code apps and barcode payments.

Japan’s card payments market is expected to grow by 7.5% in 2023 to reach $742 billion, driven by the growing consumer preference for electronic payments, as per data analytics and consulting company GlobalData,

E-money is a contactless payment method based on near-field communication (NFC) technology, which can be used via Integrated Circuit (IC) smartcards (the main IC cards are Suica and Pasmo)  or smartphones. According to the Bank of Japan, with over 5.88 billion electronic money transactions being reported in 2022, the value of such transactions reached a decade high.

The QR code was invented in Japan in the 1990s by Masahiro Hara, a Japanese engineer who worked for Denso Wave, a subsidiary of the Toyota Group.

In Japan, great efforts are being made to promote QR code payment method through providers such as PayPay, LINE Pay, Rakuten Pay, Merpay and NTT DoCoMo. Research by Statista shows that as of March 2023, the efforts made to promote QR code payments has resulted in the number of monthly active users (MAU) of QR code and barcode payment services in Japan expanding to around 74.1 million.

Buy now pay later (BNPL) payments is also gaining ground in Japan and has recorded strong growth over the last year, supported by increased ecommerce penetration. According to Japan Buy Now Pay Later Business Report 2023 by ResearchAndMarkets.com, BNPL in Japan is likely to grow by 56.5% on an annual basis to reach $14,635.1 million in 2023.

Looking ahead at the medium to long term growth story of this type of alternative payment method, driven by key players such as Paidy and Splitit, BNPL payments is expected to grow steadily over the forecast period, recording a CAGR of 31.7% during 2023-2028, as per the ResearchAndMarkets.com report.

Japan: first country to adopt real-time payments, but lags India and China in real-time payments race

Japan pioneered the real-time payments system (RTPs) with the launch of the Zengin System in 1973, but surprisingly lags behind other major Asian economies such as India, China, Thailand, and South Korea in the global race for real-time payments.

Research by ACI Worldwide shows that in 2022, Japan hit 1.8 billion RTP transactions, which represented only a 3.1% share of the total RTP transaction volume. Projected to reach 1.9 billion RTP transactions by 2027, this share is not expected to materially change, as per ACI Worldwide’s research estimates.

In stark contrast, India, remains the undisputed global leader in RTPs, with a staggering 89.5 billion transactions recorded in 2022 (46% of global real-time payment transactions) and a year-over-year (YoY) growth rate of 76.8%. Trailing India in the Asian region is China with 17.6 billion transactions, Thailand (16.5 billion), and South Korea (8 billion).

In line with the Japanese government’s recent initiatives related to payment system modernisation and accelerated digitalisation, the Zengin System is undergoing a series of upgrades.

 “In 2018, the Japanese Bankers Association and Zengin-Net launched the ‘more time system.’ The system extended operating hours to 24/7. The seventh generation of the Zengin launched in 2019 with enhancements to improve the capacity, security and reliability of the system”, states the Worldpay from FIS 2023 Global Payments Report.  

“Plans are in the works for Zengin to extend its functionality to consumer applications for the first time. In September 2022, Zengin-Net announced that they will seek to make the real-time payment system available to operators of mobile payment services such as PayPay and LINE Pay”, the report further added.

Japan’s advancement to the pilot stage of CBDC (digital yen) development

The Bank of Japan recently concluded its two-year proof-of-concept research on a potential central bank digital currency (CBDC) and has now advanced to the pilot stage of CBDC (digital yen) development.

With the viewpoint of exploring the benefits of a wholesale and retail CBDC and for ensuring the stability and efficiency of the overall payment and settlement system, the Bank of Japan has established the CBDC Forum that consists of a diverse group of 60 companies from a range of industries, including banking, payments services, retail, information technology, and fintech. The purpose of “the Forum” is to utilize the forum members skills and expertise in proceeding with the CBDC pilot programme.

The Forum includes prominent entities such as Sony, Hitachi, MUFG Bank, Japan Post Bank, Mizuho Bank, and SoftBank.

Conclusion

Synonymous with high-tech and innovation, Japan, invented the QR code and launched the first real-time payments system, and yet it was hesitant until some years ago to adopt digital payments. However, the Japanese government’s cashless vision, the country’s growing ecommerce wave, and its pandemic-driven shift to contactless payments are important factors that are changing Japan’s digital payments landscape rapidly.  

With Japanese companies intensifying their focus on pursuing generative artificial intelligence (AI), several US big tech companies (such as Google, Amazon, and Stripe) deepening their presence in Japan’s payments sector, Japan seriously considering joining India’s Unified Payments Interface (UPI) system to facilitate real-time cross-border transactions, and the expansion of its face biometrics (facial recognition) payment technology are all expected to provide a powerful impetus to the country’s digital payments market.

Furthermore, with QR codes shaking up Japan’s cash culture, and the introduction of revisions to Japan’s Payment Services Act in 2020, more opportunities are opening up for companies looking to embrace new digital payment technologies and adopt diverse payment methods for B2B payments.

With an advanced B2B payments ecosystem, and policymakers using digital payments as a means of tackling Japan’s entrenched deflation mindset, signs are visible that the Land of the Rising Sun, Japan is on the verge of a digital payments tipping point.