Why is Japan such an epicenter for Fintech development?

Financial Technology or Fintech is having a major impact on the world right now. These are the companies directly competing with the traditional financial service providers trying to come up with more efficient, faster, and more transparent services all across the globe.

Japan is the third-largest economy in the whole wide world. Tokyo being the metropolitan region generates around 20% of the whole of Japan’s GDP, making it the top 20 national economies all across the globe. Japan is well ahead of countries like the Netherlands, Switzerland, Taiwan, and Sweden. However, the country is facing a huge demographic problem at this point and time. The population peaked in 2010 at 128 million people, however, there has been a steady decline since then to 125 million with expectations of worse due to the rapidly aging populace. At the same time, the country is facing urbanization issues with a lot of smaller cities and villages facing huge depopulation problems with some estimates showing that one in six houses is already emptied out in the rural regions. 

The impact of the novel coronavirus pandemic has shown a surge in the currency trading market in Japan as well. This means that those people who are working from home are discovering new ways of making some profit with their investments. The trading volume in the individual foreign exchange market has jumped from 403 trillion yen to 1,015.6 trillion ($9.4 Trillion) in just 2 months. Fintech companies are at the forefront of blockchain technology and therefore are very much responsible for the support and the availability of the services for the Japanese people.

Cashless Payments

Industrialization has hit the world like a truck, however, there are still countries that utilize a lot of cash payments in comparison to others. Japan is coming in a close second in a “competition” with Germany with its utilization of paper-based payments. The Japanese government decided to work against this tide and promote cashless payments as much as possible. In order to achieve this, they have increased the consumption tax from 8% to 10% on October 1st, 2019. There have been several discount schemes implemented as well with subsidizations of cashless payment terminals for merchants. In addition, they started providing a 2% to 5% discount for customers when they are making a purchase from the registered SMEs or franchise stores. As a small note, this does not include national store chains. This was also done in order to get the Japanese hospitality industry ready for the upcoming Olympics, where around 40 million people were expected to visit.

Currency Trading 

With more than 800,000 active forex accounts, Japan is one of the leading markets in the world making 35% of the whole traded volume around the globe. The size has more than doubled during the last decade. Japanese traders are way different from everyone outside of the country as they usually trade on the highly volatile and high-yielding currencies like Turkish Lira and Mexican Peso as well as South African rand, while others are sticking to more popular currency pairs like USD/EUR, etc. They utilize the margin accounts to leverage modest deposits usually up to 100,000 Japanese yen). However, statistically, most of the traders as of now in Japan are middle-aged men. Although, the young blood is also pouring in with cases like Eridanus Yano, a 19-year-old student from Tokyo purely making a profit using the technique called scalping. Young people are benefiting from all of these brokerage firms that are offering demo accounts for beginners in order to help them get a small taste of what the FX market can do for them. These accounts help newbies who are trying to get into the foreign exchange market gets used to the environment and start trading in relative safety without risking the investments. 

Open Banking

In Japan, the Banking Act in 2017 has got new amendments, which started implementing a framework for regulating electronic payment service providers. They cover both payment initiation service providers (PISPs) and the account information service providers (AISPs) and create the registries for them. The banks are now required to publish all of the necessary information about their affiliation with the PISPs and AISPs. 

While European Open Banking has ruled in some provisions and allowed some limited but free use of the compulsory APIs, the Financial Service Agency (FSA) has absolutely taken its hands out of the business and left all of the negotiations to the parties themselves. The banks are trying to recover some of the cost of the implementation for Open Banking, thus, this makes fees prohibitive for startups. This is especially true for the ones based upon costly architecture.

It is worth noting that the regulator had set the previous deadline for the disclosure to happen until the 31st of May, 2020. However, due to the novel coronavirus pandemic causing huge issues all across the world and in Japan as well, the regulator has extended the deadline to the end of September and permitted the use of screen scraping. Branchless banking or digital-only banks are allowed under the Japanese legislation thus in time with the modern technology and infrastructure it will allow them to open up without restrictions and thus the end-goal of what the regulator wanted will be achieved. 

Cryptocurrency Assets

Japan is one of the first countries in the world which has established cryptocurrency regulation starting with Bitcoin as a legal tender thus creating licenses for cryptocurrency exchanges in April 2017. This has enabled Japan to have over 23 cryptocurrency exchange operators all across the country. This is reinforced by the fact that FSA has been tirelessly working on creating some kind of protection for the investors utilizing crypto assets. This means that there has been a welcoming change to the Payment Services Act (PSA) and the Financial Instruments and Exchange Act (FIEA), which has strengthened the protection for said investors.