Japan’s new banknotes might have come too late

Next week, Japan will introduce three new banknotes for the first time in 20 years, adorning them with a heavyweight trio from the stratospheres of science, higher education and raw, unbridled capitalism.

But this is no straightforward or low-cost switch. It was never going to be in a country that has 3.9mn cash-ingesting vending and ticketing machines, acute labour shortages and government targets for pushing the country towards cashlessness. The redesigned notes could either drive inflation or suppress it and few seem sure which will happen.

The notes, which feature an extensive suite of updated anti-counterfeiting technology, are attractive and redressive. One note features the microbiologist Shibasaburo Kitasato, who should have won a Nobel Prize; another the pioneering educator Umeko Tsuda, who deserves eternal accolade. The choice of Eiichi “father of Japanese capitalism” Shibusawa (1840-1931), for the largest denomination (¥10,000) note, was also belated: the serial industrialist has always belonged on Japan’s money after founding close to 500 companies, the Tokyo Stock Exchange and the country’s first modern bank. 

The difficulty, though, lies in predicting what happens once these beauties go into circulation on July 3. In a country that still likes cash and its connotation (in a digitally scrutinised era) of freedom, are they a triumphant celebration? Or are they the shortlived equivalent of opening the world’s most delightful branch of Blockbuster Video circa 2014?

Japan is clearly going cashless more quickly than previously expected. In 2010, according to the Ministry of Economy, Trade and Industry, Japanese consumers were conducting just 13.2 per cent of transactions with cards and e-money. By 2013, that rate had crept up very slightly to 15.3 per cent. But a decade later in 2023, it had reached 39.3 per cent — very much on track to exceed the government’s target of 40 per cent by 2025. 

The path from here is entangled with Japan’s demographics and the economics of continuing use of cash as the population dwindles. Cashlessness, generally speaking, suits businesses looking to save costs at a time when their wage bills are rising. 

Japan’s modern history as a cash-heavy society has been maintained by various factors, with the general safety of society and low crime rate high among them. But labour excess has also previously been critical: safely and quickly moving large volumes of cash between banks and businesses was relatively cheap when there were plenty of people available to do that. Now there are not.

Expansive armies of cash-dispensing ATMs have helped keep the cash-system rolling with the appearance of automation. In fact, they are just fronts for the substantial human activity involved in ensuring they are stocked and maintained. The banks, particularly the regional ones doing all they can to migrate customers online, are increasingly short of people. As labour costs rise, they would love to need fewer ATMs.

Shrinking Japan, therefore, should favour further acceleration of cashlessness; it would, in theory, keep operational costs of retail and the service sector a little lower and thus allow businesses to hold off on price increases.

The real decider, though, looks likely to be the vending machines — an immense standing army that include roughly 2.2mn selling drinks, thousands selling rail tickets and tens of thousands in restaurants across Japan, all in lieu of a cashier.

The problem is that cashlessness, while rising, is nowhere near complete and pretty much none of these machines can accept the new notes without recalibration or replacement. And that, awkwardly, requires both people and significant cost.  

The railways and buses are on track to have about two-thirds of their machines ready by next week. The Japan Vending Machine System Manufacturers Association reckons, though, that only half of the restaurant machines and about a quarter of the drinks ones will accept the new bills once Shibusawa, Tsuda and Kitasato start appearing in wallets.

With parts and labour costs rising, recalibrating even a small machine can cost anywhere from $1,000 to $3,000. Buying a new one can run at anything up to about $14,000 — enough to put real pressure on the economics of the type of small restaurants on which Japan depends.

The only option, restaurant owners have now taken to telling Japanese media, is to raise the prices charged to customers. It seems the father of Japanese capitalism will, from almost a century beyond the grave, still be working his magic.

leo.lewis@ft.com