Historically one of the world’s largest economies, Japan has set a global benchmark for economic development in the last century. Aside from becoming a powerhouse that produces global leaders in transportation, electronics and pop culture, will the rise of fintech also join Japan’s growing list of accolades?
After the Second World War, Japan eventually enjoyed significant economic growth, driven by rapid industrialisation. It produced world-leading automotive players including Toyota, Honda, Mitsubitshi and Suzuki, as well as other global giants in electronics, including Sony.
This growth made Japan the world’s second-largest economy behind the United States, although it was eventually overtaken by China in 2010. Now boasting the third-largest economy, financial services play an important role across Japan, especially in its capital Tokyo. Alongside the likes of Hong Kong, Shanghai and Beijing, as well as Seoul, Tokyo is one of the leading financial centres in the Asia-Pacific region, according to the Global Financial Centres Index (GFCI).
A traditionally conservative market
Despite the country having the third largest economy globally, Japan currently faces several challenges. With an elderly population, Japan hasn’t traditionally opened itself up to much immigration.
People over 65 will be expected to account for over 35 per cent of Japan’s population by 2040, according to the National Institute of Population and Social Security. Playing a bit part, with a large elderly population, much of Japanese society generally favours traditional banks, which hasn’t helped much with the global rise of fintechs and other technological innovations.
Despite producing some of the world’s most innovative products, Japan’s financial services sector has lagged behind as its population remains unwilling to adapt.
Much of the population remains conservative and this is also reflected in its financial preferences. For instance, despite it rising due to COVID, cash remains king (not common compared to the developed world). In 2022, Japan’s cashless payments proportion sat at 36 per cent (rising from 21.3 per cent). Much of this growth was driven by credit card usage, according to the International Monetary Fund (IMF).
Last year, the usage rate of financial services online in Japan was at a mere 17 per cent, a far cry from the global average of around 30 per cent.
Government support to support digitalisation
Despite the challenges of embracing fintech and wider digitalisation in a overall conservative nation, there have been efforts and support from the government to do so.
As far back as 2016, the Bank of Japan (BOJ), established a fintech centre that aimed to promote the sector’s sustainable growth and understanding of digital currency. Fast forward to 2020, this would see seven international central banks, including the BOJ and the Bank for International Settlements (BIS), publish a report assessing the feasibility of central bank digital currencies (CBDC) in assisting central banks in accomplishing their public policy objectives. BOJ launched various proof of concepts in the next few years, and is potentially planning a pilot.
Later, the country would see other initiatives like its regulatory sandbox being launched in 2018. At present, Japan has around 600 fintechs, larger than much of its Asia Pacific peers However, this pales in comparison to developed economies such as Singapore – a city with under six million people, but 1,600 fintechs.
Genuine fintech growth?
The popularity of QR payments is undeniable across Asia, and this trend is also evident in Japan. While QR payment transaction volume was close to nil in 2018, the payment method ballooned to over $50billion by 2022.
The cryptocurrency sector is also worth over $1.3trillion in the country, following governmental efforts to support the sector with clear regulation and other streamlining efforts.
Finally, besides just payments and digital currencies, other subsectors of fintech such as payments and lending, buy now pay later (BNPL), as well as insurtech, regtech, crowdfunding and digital banking have all enjoyed positive levels of growth.
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