Japan is not the only G7 economy where cash is still King, and that could complicate the roll out of CBDCs in so-called “advanced” economies.
On June 20, Asia Times ran an op-ed by Sayuri Shirai, a former policy board member of the Bank of Japan, on the Bank of Japan’s recent decision to shelve its plans to introduce a central bank digital currency (CBDC). Given Japan is the third largest economy on the planet and is often at the leading edge of technological advances, this is a major development. Yet it received virtually no airtime in the international mainstream press.
Cash Still King in Tech-Obsessed Japan
Since 2021 the BoJ has been conducting experiments to test the technical feasibility of the core functions and features of a retail CBDC ecosystem. The second phase of testing began in April 2022. But according to Shirai, the bank has decided to abandon the idea, at least for the foreseeable future. Shirai lists a number of factors behind the decision, foremost among which is the undimmed popularity of physical cash as a means of payment in Japan:
Cash remains king in Japan…
The Japanese public has virtually universal access to the banking system and so the issue of promoting financial inclusion has never been a major policy issue. The use of digital and mobile technologies initiated by the private sector when paying for goods and services is also widespread.
The CBDC idea has not received significant support due to the prevalence of internet banking services, credit card usage and e-money payment tools. The public may not find it attractive to use the CBDC since private sector-based payment tools provide tangible benefits — for example, points that can be gained from using payment services and can be accumulated and used for shopping or payment for other services.
Cash is a safe and highly liquid instrument for the payment of goods and services. As legal tender, cash fulfills the functions of unit of account, means of exchange and store of value. The amount of cash issuance remains high in Japan despite the declining use of cash — accounting for about 20% of nominal gross domestic product.
Cash becomes more useful when natural disasters or military conflicts cause serious damage to communities – for example, via power shortages or the destruction of buildings and computer systems or by weakening trust in the private-sector banking system.
In tech-obsessed Japan, the country that first popularized mobile wallets and smartphones, cash is still king. As I noted in an article for WOLF STREET back in 2016, the value of banknotes in circulation, at ¥90 trillion ($885 billion), or about a fifth of gross domestic product, is the highest in the world as a proportion of the economy.
Demand for cash remains solid, to the increasing consternation of global credit card companies. In a 2013 report, MasterCard estimated that 38% of the total value of the country’s retail transactions were in cash — almost twice the rate in the U.S. and five times the rate in France.
It is not just credit card companies that have been left scratching their heads frustratingly at Japanese people’s soft spot for physical lucre. In October 2016, Tim Cook vented his spleen against cash during a visit to Tokyo, telling the Nikkei that “we don’t think the consumer particularly likes cash.” It was a bizarre conclusion to reach in a country where cash is offered and accepted reverentially even when paying for groceries and where every ¥10,000-note is treated with utmost care. As a rule, they are pristine.
Six years on, the Japanese affection for cash remains undimmed, despite the disruptive effects of the COVID-19 pandemic, including the demonization of cash as a vector of contagion. In a survey by Statista in January 2021, more than 90% of respondents named cash as their preferred payment method, citing reasons such as security and reliability. Fifty-five percent of respondents expressed concerns about the risk of personal data leakage when using electronic payment methods. Nearly 42% worried about credit cards and account details being stolen while around 38% said cashless options made them less aware of the amount of money they are spending, increasing the risk of spending too much.
Shirai proffers another reason why cash has not lost its luster — namely the Bank of Japan’s application of a zero interest rate policy (ZIRP) over the past decade and a half:
[Even as bricks-and-mortar retailers have upgraded their cashless payment systems], cash in circulation has been rising. This is partly because of the long-standing low retail deposit interest rate — which was below 0.2% from 2007 through 2010 and below 0.02% from 2011 through 2016, and has been at 0.001 per cent since 2017 for ordinary retail bank accounts.
That has transformed cash into a substitute for bank deposits, contributing to Japan’s rising cash hoarding trend. Cash hoarding refers to cash lying idle without being utilized for economic and investment activities.
In a paper released in May the Bank of International Settlements reported that 90% of 81 central banks surveyed from October to December 2021 were “engaged in some form of CBDC work,” with 26% running pilots on CBDCs and more than 60% doing experiments or proofs-of-concept related to a digital currency. The BIS attributed the growing interest around CBDCs to the recent shift to digital solutions during the COVID-19 pandemic as well as recent growth in stablecoins and other cryptocurrencies.
So-called retail CBDCs offer a range of potential benefits including reduced transaction costs, more efficient cross-border transactions, real-time payments and reduced illegal transactions. But the biggest benefits would almost certainly end up accruing to the central banks themselves, which would gain far greater centralized control over the economy. That is where the potential drawbacks for the rest of us begin.
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