How Will Japan's New Banknotes Impact the Economy and Small Businesses?

Japan will introduce redesigned banknotes on July 3. In preparation, businesses and municipalities are updating their change machines, cash registers, and ticket machines. Bank ATMs and railway ticket machines are expected to be ready by the issuance date, minimizing the impact on daily life. However, it is unlikely that all of the beverage vending machines across Japan will be updated in time.

Burden on Small Businesses

"The cost of updating our change machine for the new banknotes is higher than what we paid for our second-hand change machine," says Takashi Honda, owner of the ramen shop Menya Aozora in Chuo Ward, Osaka. He has already spent around ¥100,000 (approximately $630 USD) to update his ticket vending machine but hasn't updated the change machine, which would cost ¥200,000.

At Menya Aozora, ramen prices start at ¥750 (around $5), the same as before the COVID-19 pandemic, despite rising costs for ingredients and electricity. "It's tough to cover the costs of updating for the new banknotes. Any subsidy would help," says Honda.

Upgrading machines for the new banknotes can cost over ¥1 million, which poses a significant burden on small businesses. To alleviate this, some municipalities have started offering subsidies. For example, Katsushika Ward in Tokyo is providing up to ¥300,000 per machine to small and medium-sized businesses. Similarly, Oguchi Town in Aichi Prefecture has been offering up to ¥500,000 since September 2023.

*Samples of the new banknotes (front side). National Printing Bureau, Kita Ward, Tokyo, June 28, 2023. (©Sankei by Masahiro Sakai)*

Lagging Behind

However, only a few municipalities offer subsidies for upgrading machines, so it remains unclear how many small businesses will comply by July.

The Japan Vending System Manufacturers Association expects almost all bank ATMs and railway ticket machines to be upgraded by July. Additionally, it anticipates that the 2.21 million beverage vending machines across Japan will be "upgraded gradually while considering the number of new banknotes in circulation."

Economic Impact

The association estimates that the upgrades will have an economic impact of ¥500 billion. Cash processing machine manufacturers are seeing a surge in demand. Industry leader Glory has increased its workforce by an average of 300 people since summer 2023 to meet peak production demands. In fiscal year 2023, sales and maintenance of products compatible with the new banknotes generated ¥50 billion in revenue.

Similarly, Oki Electric Industry Company (OKI), a leader in the domestic ATM market, is experiencing sustained production peaks. The demand for hardware updates due to the new banknotes is expected to persist over the next two to three years.

However, the economic impact is likely to be smaller than that of the previous issuance of new banknotes in 2004. Glory anticipates a revenue increase smaller than the ¥90 billion seen over the three years surrounding the last issuance. Some machines can accept new banknotes with a software update, which could be contributing to this trend. Another factor is the growing adoption of cashless payments.

Shift Toward Cashless Payments

As the transition to the new banknotes gains momentum, there is also a growing push toward implementing fully cashless systems in restaurants and municipal offices. Despite Japan's lower adoption rate of cashless payments compared to other advanced countries, the new banknotes may spur increased adoption due to the high costs of handling cash.

In March, the Ministry of Economy, Trade and Industry reported that Japan's cashless payment rate reached 39.3% in 2023, marking a 10-point increase since 2019 when new banknotes were announced. The rise is attributed to the growing use of credit cards and QR code payments.

According to the Payments Japan Association, as of 2021, major countries had significantly higher cashless payment rates compared to Japan, including South Korea (95.3%), China (83.8%), Australia (72.8%), the United Kingdom (65.1%), and the United States (53.2%).

Minimizing Labor Costs

These differences stem from varying levels of trust in cash and the accessibility of alternative payment methods. In Japan, cash is less prone to counterfeiting and ATMs are widely available.

However, some Japanese businesses and municipalities are adopting cashless systems to reduce labor costs. For example, Saitama Prefecture has been mainly accepting cashless payments for driver's license renewals since January, aiming to minimize the labor costs of handling revenue stamps.

Similarly, Global Dining, a company that operates restaurants and cafes primarily in the Tokyo metropolitan area, has fully transitioned to cashless operations at all its domestic stores since January.

A Payments Japan Association spokesperson noted, "More businesses may adopt cashless payments to avoid the upgrading costs for the new banknotes and the rise in labor expenses."

Reasons for New Banknotes

Toshihiro Nagahama, Chief Economist at Dai-ichi Life Research Institute, explains that the primary reason for issuing new banknotes is to combat counterfeit money. However, he also suggests another motive: to encourage people to bring out any cash they have stashed away at home.

Personal cash holdings in Japan exceed ¥100 trillion (about $636 billion). There is a notable trend, especially among the elderly, of keeping cash stored at home. Since this money remains unused, redirecting it towards consumption or investment could benefit the economy.

Nagahama further notes that the Japanese government aims to increase cashless transactions to 80%. This would help mitigate labor shortages and reduce the costs of installing and operating ATMs.

(Read the article in Japanese.)

Author: Hiroto Kuwajima, The Sankei Shimbun