Japan remains one of the last remaining bastions for cash payments. Why are Japanese consumers so reluctant to give up cash?
Cashless payments have been steadily on the rise in Japan, but still fall behind other developed nations. In 2014, 16.9 percent of all payments were cashless. This number grew to 20 percent by 2015 and steadily rising to 29.7 percent by 2020. In 2023, cashless payments represented 39.3 percent of all private final consumption expenditure in Japan. Credit Cards were the preferred option, followed by QR codes and e-money through NFC technology.
Japanese consumers relation to cash
In 2018, Susan Crawford from Wired Magazine, zoomed in on the dynamics and meaning of cash among Japanese citizens. Japan was an outlier in Asia, where countries like China and South Korea were rapidly moving away from cash payments. In Korea almost all transactions were cashless and in China, this figure rose to about 80 percent. This is in stark contrast to Japan, where the majority of retail payments were made through cash, with physical cash still holding significant meaning in the country.
Soichiro Takagi, professor at International University of Japan, explained that removing cash from the transaction doesn’t necessarily remove friction during the payment. Pointing out that Japanese retailers are very apt in counting change, with buyers having high confidence that shopkeepers give accurate change. Shopkeepers also place high value into the feel of bills, how they handle it and the ceremonial aspect. Customers themselves also believe it’s a testament of the loyalty they have for the shop owner. They are aware that a portion of the cashless payments are going to the payment provider, hence they stick to cash to ensure all the money goes to the owner.
This doesn’t mean that Japan is completely devoid from cashless payments. In the opening paragraphs of this piece we saw that cashless payments were on the rise, with credit cards enjoying a certain amount of popularity among consumers. In cities like Tokyo prepaid smart cards such as PASMO and Suica are widely accepted in retail stores and public transport. Sakura explained that these cards are popular as they are not linked to a bank account, meaning users won’t spend money irresponsibly.
The historic role of cash in Japan
The role of cash across Japan goes well back to the middle ages, built through Chinese influence. During the 8th century the Japanese government, who began modeling after the Chinese social system, started issuing coins that displayed the power and independence of the nation, the Currency Museum of the Bank of Japan noted. By rewarding those who kept large quantities of coins, it ensured that coin circulation expanded. These coins in turn were used to fund the construction of the Heijo imperial palace. By this point in time, the perceived value of the coins became greater than the value of materials it was made of.
After a period of decline due to copper coins rapidly decreasing the value of Japan’s monetary system, accompanied by the loss of faith of its citizens in the currency, coins began making ways for alternative payment methods. Goods like rice, silk and clothes became their substitute. It was when the usage of copper coins was disbanded, ultimately helping to rebuild trust in the once strong currency from decades prior, that Japan’s coins regained their value.
As trading in goods, such as heavy rice bags, clothes and silk was inconvenient, a credit economy started to flourish. This in turn helped to reduce transportation costs, with government offices issuing payment orders, the Currency Museum highlighted. However, between the 11 and 12th century, Chinese copper coins found their way back into Japan’s currency system. The Japanese government itself had seized coin issuing, leaving its citizens with only Chinese coins.
The need for coins remained, which resulted in private entities issuing Japanese coins. This practice would continue throughout medieval Japan. As Chinese and privately minted coins became more popular due to increased demand, they also proved of poor quality, spurring feudal lords and the government to control the circulation of coins once more. They ordered the ban on coins, also known as erizeni, to maintain stable circulation. The prevalence of Chinese coins persisted into the 15th century.
At the turn of the 16th century, gold and silver coins were introduced as feudal warlords actively started to mine for raw materials with Oda Nobunaga fixing the exchange rates between gold, silver and copper. This ‘tri-metallic monetary system’, was fundamental in currency standardization efforts employed by the government. During the second half of the 16th century, inflow of Chinese coins was disrupted and their circulation started to decrease.
Brand loyalty
The loyalty to certain brands by Japanese is a well-known and researched topic. Bank Santander noted that Japanese consumers are very brand loyal, with older generations more so than their younger counterparts. Younger generations seek out novelty and are willing to switch brands, which results in declining rates of brand loyalty. This in part is fueled by strong social media usage, which allows for less established brands to carve out a customer base.The strong penetration of social media doesn’t mean brand loyalty has entered a freefall.
Google found that 63 percent of Japanese were loyal to a brand without having the company’s app on their phone.A January 2022 survey cited by Statista showed that brand loyalty for personal care products and household cleaning products is primarily dictated by likeness, representing 49.1 percent, the product works well, accounting for 33.1 percent and, having used the product for a long time representing 30.7 percent with 11.7 percent stating the product is available at the store they frequented. The latter two tie in neatly with earlier observations made by Santander in regards to brand loyalty.
Modern Japan is still infused with its cultural history, which still dictates many of the subtle and less subtle aspects of daily life. The concept of Bushido, or “way of the warrior”, a strict moral code still finds its way into modern day Japan. The true origins of the concept are difficult to trace, ThoughtCo noted, but the concept inhibits certain core principles that serve as the foundation of Japanese culture.
Bushido might stem back to the era of the samurai, the defeat in World War II implied the end of the once so prevalent and highly honored moral code. However, while die-hards, ThoughtCo exemplified, might have been carrying the code beyond World War II, many citizens in the nation were embarrassed by their ways. Hence, the bushido was destined to become a relic of the past. However, while many would’ve believed this, bushido resurfaced when the Japanese economy started to flourish during the 1970s.
Japan grew into an economic juggernaut over the course of the 1980s and bushido started to become a popular mantra once again. But, where bushido was once reserved for a warrior class and civil society, it has now transferred to Japanese work culture. Relentless dedication and loyalty to the company became the norm. Perfectionism, a badge of honor. This work ethic has a sinister side, where workers would work themselves to death for their employer. As the economic tides started to shift downwards, the dedication to employers started to wither.
Going cashless
The reluctance to depart from cash, both from consumers and retailers alike, government and entrepreneurs are looking for novel ways to promote the adoption of cashless payments. In July 2019, Rakuten spoke with President of Rakuten Payment, Koichi Nakamura about the company’s efforts to expand the market share for cashless payments. Firstly, Nakamura noted that cash was deeply rooted in Japanese society, going as far as to say it’s a national identity. Continuing by explaining that the Japanese yen is extremely stable, with counterfeit bills being non-existent.
A Japanese person will never hold a bill up to the light, he points out. A sign of the high faith in the currency. Japanese also fear debt, which pushes them to favor cash. Only in supermarkets, Nakamura notes, is e-money more popular than credit cards. This might seem surprising, he adds, but Japanese consumers will top up their e-wallets with cash, solely to buy items with their e-money app, even when owning a credit card. This stems from mistrust of debt.
The reluctance to adopt alternative and novel payment technologies isn’t unique, as with any new technology, initial adoption is slow. Changes in culture need to develop and the necessary infrastructure has to be put in place for the technology to take. Nakamura points toward credit card adoption in the United States. While the payment solution might be widely used, cashless payments through NFC are a rarity. This due to existing infrastructure having to be replaced, that has to accommodate new solutions.
Rakuten’s solution meanwhile, skips the expensive infrastructure part and allows for merchants to use their smartphones as payment terminals. This drastically reduces the barrier to entry. QR-codes, which have seen a rise in popularity, serve as economical solutions, contrary to payment terminals which see an upfront investment of at least 300,000 yen, with the cost for implementation falling entirely on the merchant.
Cashless payments only
Rakuten has been radical in their approach to make mobile payments work. In order to promote cashless payments, it tried non-cash purchases in its Tohoku Rakuten Golden Eagles stadium over the course of April and May 2018 fans could only pay for food and beverage through QR-codes. While odd at first, visitors quickly became used to the new payment method with Rakuten seeing sales soar by 20 percent over this period.
Marketing manager for Rakuten’s mobile payments, Hayato Morofushi, told Reuters the pilot was a success, especially when considering that QR-codes have been only slowly emerging across Japan. The team at Rakuten didn’t expect such great initial pick-up. One reason, Reuters noted, citing experts, is the ability to more efficiently handle payments, resulting in shorter queues, improving customer satisfaction. This in turn leads to higher sales.
Whatever the reasoning, the success at Rakuten serves a crucial milestone for cashless payments to take off in Japan. Regulators in Japan are hoping to break the deflationary trend where consumers have become accustomed to lowering prices, Reuters notes, leading to delayed spending. The news outlet notes that The Bank of Japan has spent over $3 trillion since 2013 on monetary assets, including bonds, to reach an elusive 2% inflation rate. To no avail.
Meanwhile, an upcoming increase in sales tax from 8 to 10 percent in October 2019, has left the Japanese government worried that spending would plummet further. Hence, it hopes that novel technologies such as mobile payments will mitigate some of the damage. Discounts will be made available when consumers use QR-codes or mobile payments over a period of nine months. The promotional scheme will cost the government $2.6 billion.
Director of the Japanese Economy Ministry’s cashless promotion office, Masamichi Ito, explained to Reuters, that if the government succeeds in changing how people pay, they can change society as a whole. Hence, the office has set an ambitious target to reach 120 trillion yen in cashless payments by 2025. This will prove challenging as at the time of writing cash still represented 80 percent of all transactions in the country. The low crime rates amplifies the usage of cash, as there’s little incentive to minimize the amount of cash on hand.
Furthermore, while Masamichi might be optimistic about pushing cashless payment, and its power to overhaul society, we cannot disregard the ways in which traditionalism is ingrained in Japanese society. The fact that the concept of Bushido, while on the decline, has made it well into modern Japan, shows how reluctant citizens are to part ways with the past.
Razor thin margins
We can also not omit the fact that profit margins are razor thin at Japanese retailers, which strengthens the deduction of consumers to stick to cash to ensure their favorite business remains operational. Researcher at NLI Research Institute, Yuki Fukumoto, noted that the average profit margin for smaller Japanese retailers sits at an uncomfortable 2 percent. Meaning that every yen drawn away from this tight profit margin, putting turning a healthy profit in jeopardy.
Many observers will argue that the retailers should raise prices in order to maintain prices. But raising prices has been, and still is, a controversial topic. Only recently have Japanese companies changed course and raised their prices. However, mere years ago, raising prices, even in an upward economic climate, was considered unthinkable. In January 2018, Fashion Network reported that, as the country’s economy flourished, with profits reaching new records, with wages bound to go up, little retailers and restaurants were reluctant to raise prices.
The two decades of deflation has resulted in consumers sitting on the fence, on the lookout for lower prices. Meanwhile, retailers operate in a space, where they walk a tightrope of remaining profitable whilst maintaining a customer base, who is always looking for a cheaper deal. President of one of Japan’s largest retailers, Aeon Retail, Soichi Okazaki, said that competitors are monitoring prices at rivals, in turn leading to lowering their prices. In order to maintain revenue, Aeon is forced to react by lowering its prices as well. Aeon frequently uses discounts of 10 on average for everyday products.
Parent company of Uniqlo, Fast Retailing Co Ltd, saw sales decrease after it raised its prices back in 2014. However, it was able to bounce back, seeing record products thanks to overseas sales. Despite the optimism, the Fashion Network cited, while economic forecasts looked strong, shoppers remained on the fence. Takeshi Okazaki, CFO at Fast Retailing, commented that consumers were very strict on pricing, hence executives at the company remained cautious about further developments.
In January 2022, the pricing dynamic started to shift drastically as Japanese retailers saw themselves forced to raise prices as costs increased. The change in attitude strayed away from the ever present reluctance to raise prices. One such company, being market leader in astronomy telescopes, Vixen Co Ltd, announced it would raise its prices for its lower end models by 24 percent.
Spokesperson for Vixen, Yasuhisa Tsuzuki, explained that as costs would go up and with the company not raising its prices, maintaining current pricing would bring the company into jeopardy. The price increase was fueled by higher wages in China. Adding that the company hasn’t faced any backlash, continuing that prices of telescopes aren’t on the radar for many consumers, compared to necessities such as milk or eggs which are catching headlines.
Shirakawa Sogyo Co Ltd, specialized in importing and selling violins similarly raised prices for Swiss-made violins by 36 percent. President at Shirakawa, Susumu Shirakawa, told Reuter that the company had already been operating on tight profit margins due to a weak yen competing against the Swiss franc. As consumers have been faced with higher prices, raising prices at Shirakawa was easier. Furthermore competitors were raising their prices as well.
There’s a lot of nuance as to why Japanese consumers stick to cash. Across many facets of Japanese life, traditionalism remains strong. The respect for companies and retailers is upheld to this day. While the effects may be withering, compared to Western cultures, they are maintained as time progresses. Consumers are aware of the tight margins their favorite stores operate at. Simultaneously, retailers are afraid to switch, as every commission to a payment service provider, cuts deep into their revenue.
Deflation has resulted in consumers remaining alert for lower prices, knowing that a decrease is always on the horizon. This makes it extremely difficult for policymakers to introduce new technologies such as cashless payments, despite high trust in the local currency. Ensuring that price increase by the desired 2 percent has been troublesome in the last decades, as Japanese consumers hold onto their wallets, awaiting the next decrease. Changing this dynamic proves to be challenging.
Cashless Japan
Japanese citizens are also reluctant to take on debt, borrowing the same sentiment as their German counterparts, who distrust digital payments. There’s also a strong sense of loyalty to local retailers, who work on razor thin margins. With customers being aware of the struggle to turn a profit, ensuring that as much revenue remains at their favorite retailer is paramount and enforces the willingness to keep paying with cash, despite the convenience of cashless payments. However, cashless payments are seeing an increase in adoption over the course of the 2020s.
A March 2024 survey on the General Public’s Views and Behavior published by the Public Relations Department from the Bank of Japan showed that the frequency of cash usage has decreased over the previous six months before the survey publication. In August to September 2023, 39.2 percent of respondents indicated that their cash usage had decreased. A small minority of 8.8 percent replied that their usage of cash had increased. Credit cards remained the most popular cashless payment option, seeing its adoption increase from 68.2 percent in March 2023 to 69.6 percent a year later in March 2024.
Payments made through QR-codes saw strong growth, coming from 37.1 percent, increasing to 41.9 percent over the same period. Direct debit cards saw a small uptick from 32 percent to 33.5 percent between March 2023 and March 2024. The percentages seem minor, but over such a short time, cash has made place for cashless alternatives across multiple payment options available to customers. Respondents said their primary reasons for switching to cashless alternatives is receiving reward points and discounts. Others liked the convenience of cashless payments, including easy access to account statements and payment records.
Respondents indicated that their frequency of cashless payments would increase when points and discounts would be included, no risk of unauthorized usage and careful handling of personal information. However, as long as retailers keep offering cash options, respondents said they would keep using cash during their daily payments. Furthermore, cash prevents overspending and payments can be completed easily and fees or commissions can be omitted.
The reason to not switch to cashless payments is still very much present. The prevalence of cash based alternatives prevents cashless payments from taking flight. One might debate how necessary it is for cash to be removed, as it’s a vital part of the economy and ensures all layers of society can benefit from it. Additionally, there are a wide variety of reasons why Japanese consumers remain loyal to cash, which aren’t easily removed in a society with strong ties to its cultural heritage.
