Digital Currency Developments in Japan: Throwing Good Money After Bad?

Saturday, June 17, 2023

Japan, a stalwart of cash society, shifted to digital when the pandemic pushed payments into a new paradigm – community currencies, writes Nishibe Makoto of Senshu University. The country has now launched a pilot digital yen scheme.

Digital Currency Developments in Japan: Throwing Good Money After Bad?

Sarubobo coin kiosk, Takayama City, Japan, October 2020: Digital currency to support the community (Credit: SaruboboCoin on Facebook) 

In Japan, cash is still king. But since 2011, the cashless payment ratio has more than doubled and in 2020 cashless payments accounted for 29.7 percent of consumption spending. Several private, QR-code-based payment systems have been operating since 2018 and are now in fierce competition as consumers tap into their smartphones to carry out contactless transactions. The current leading system, PayPay, established in 2018, had roughly 56.6 million users in fiscal year 2022. (Japan has a population of 125 million.)

This trend is intersecting with community currencies — currencies issued at a local level to encourage growth and development — that were intended to reduce both the Covid-19 infection rate and the outflow of currency from communities. Japan has a mature ecosystem for community currencies, having experimented with them since 1973. The Volunteer Labor Bank’s system is an example. Its purpose was to support women volunteering in childcare and healthcare, offering one point (about 400 yen) to volunteers per hour of service. A decade later the scheme has been replicated in other parts of the country, with varying levels of success. Meanwhile, Japan started a digital yen pilot scheme in April 2023.

Gresham’s Law — that “bad money drives out good (money)” — explained the public tendency to hoard legally undervalued coins, whilst circulating legally overvalued currency. Henry Gresham, an English merchant and financier living in the 1500s, the Tudor period, was exploring the debasement of minted coins. But the concept of “good money” is increasingly applied to modern digital currencies such as cryptocurrencies.

Friedrich Hayek, the Austrian-British economist writing four centuries after Gresham, argued that a currency could become “good money” when multiple currencies of different quality mutually compete and offer a choice to consumers. He argued that “good money drives out bad.”

Going and promoting digital: Aqua Coin recognizes he participation of stores in Kisarazu City, April 2023

Going and promoting digital: Aqua Coin recognizes he participation of stores in Kisarazu City, April 2023

Digital community currencies such as Sarubobo Coin in Hida Takayama City and Aqua Coin in Kisarazu City, have been spreading in local communities, aiming to become “good money”. To encourage their use, employees of local government, local institutions and chambers of commerce receive those coins as part of their monthly payment packages. Whether they will be able to create a virtual local currency market in the respective communities and succeed in supporting regional development is another question. If the circulation of these currencies can spread from the consumer goods market to include production goods, investment goods and labor, then these digital currencies will be on their way to becoming “good money” in their communities.

What is it worth to you?

Both Sarubobo Coin and Aqua Coin are pegged to the yen, offering a stability not enjoyed by many other digital currencies such as cryptocurrencies. The principle of choice in currency, however, does not apply while currencies are monopolized by the state and legal tender is dominant. The "one nation, one money" institution of modern money still prevails.

For choice in currency to apply, the currencies must have different denominations of measure, and their exchange rates must not be fixed entirely. The question is: Is it a good time to be pegged to a native currency?

For digital community currencies with relatively low circulation, the answer is almost certainly yes. Central bank balance sheets across the world, however, rapidly expanded as countries grappled to support their economies in response to the Covid-19 crisis. The Bank of Japan (BoJ), under its Abenomics policy, continued quantitative easing (QE), or an unlimited supply of cash currency with negative interest rates, in an attempt to achieve an inflation target of 2 percent. Japan has seen two prime ministers since Abe Shinzo stepped down in 2020, but its highly loose monetary policy has remained largely unchanged, though the central bank now has had a new governor since April this year.

The weaker yen improved the performance of exporting companies and boosted stock prices. Inflation did not occur as expected, however, because banks did not increase their lending to supply deposit money to the market because of the risks of lending in a slow economy. The government's inflation targeting policy has aimed to improve the economy by raising nominal prices through an increase in money stock despite the lack of favorable investment opportunities.

During the pandemic, fears of above-target inflation fueled by Covid-related supply chain shocks caused markets to slide, as concerns about the Omicron infection wave were priced in and uncertainty reigned. But in March 2022, core inflation did increase above the BoJ’s target, driven by global energy and supply-chain disruptions due largely to the Ukraine crisis, and has remained above it through April 2023, fueled by the return of tourism. Headline inflation reached a four-decade high in February 2023, with core inflation (not including fresh food and energy) hit a four-decade high of 4.1 percent in April 2023.

The question in Japan and elsewhere is whether native currencies – and indeed the arrival of central bank digital currencies (only at pilot stage of development in Japan) – will “drive out” digital community currencies? Or will the need to support local communities, ebbing thought it may be with the end of the pandemic, catalyze a revolution in community currency uptake? Will Gresham’s or Hayek’s law apply?

This article is published under Creative Commons with 360info.

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