Japan’s suffocating fintech regulations are getting an update

This is part one of a two-part feature on fintech in Japan. You can read about 10 of Japan’s fintech pioneers here.

World, Tokyo here. Fintech has landed. Photo credit: Miyabi Inoue.

Before last year, fintech was barely on the radar in Japan. According to a report by Accenture (PDF), Japanese investments accounted for only 0.40 percent of the roughly US$12 billion invested into fintech globally in 2014. But things are changing. Research by the Tech in Asia data team shows that investments into fintech startups more than doubled in Japan during 2015, hitting US$141.73 million.

The conversation started when a midterm report (PDF) by the Financial System Council showed that Japan was far behind other nations in financial technology. The government started to use the word “fintech” in its publications, and the banks got moving when they realized startups had been seeing something they missed.

The road to innovation is a long one though. To catch up to the world and turn its stagnant economy around, Japan first needs to overcome the regulations and culture holding its banking system back.

Stagnation

Japan has a lot of money. Total personal financial assets in the country are worth US$14.36 trillion – 52 percent of which is held in cash. Traditionally low inflation rates in Japan have meant that holding on to cash was not a risk, but the government has recently adopted negative interest rates in the hope of raising inflation and spurring the stale economy which only grew on average 0.48 percent yearly from 1980 to 2015.

New laws have been adopted to encourage ordinary people to invest rather than save. Since January 2014, personal investors have been exempt from taxes on profits of up to US$8,890 per year with the Tax Exemption Program of NISA (Nippon Individual Saving Account).

Japan has a lot of cash money. Photo credit: Dick Thomas Johnson.

The negative interest rate also puts pressure on banks to look for profits in other areas.

“If you’re just reliant on the interest margin, you’re doomed,” says Mio Takaoka, who is in charge of new business development and investments for online securities trading platform Monex.

But Japan’s banks are cautious about moving away from their traditional models – especially into a space that lacks clearly defined rules.

It’s not really about the innovation – it’s just about making sure the banking system doesn’t crash.

Unlike the US and Europe where regulators have created a sandbox for fintech startups to try things and then create laws where needed, Japan is less culturally inclined to innovate where rules are not defined. Katsuaki Sato, founder and CEO of Metaps and its payment service Spike says, “There are a lot of grey areas in Japan. If they would just make it black and white, it would be easier to move.”

Revitalizing

Now is the time