Key Highlights

  • Introducing digital currencies would allow countries like Japan to incentivize economic behavior, such as putting greater spending power in peoples’ hands
  • Japan’s demographics make it an interesting test case: given its shrinking population and risk-averse culture, what is the balance between harnessing innovative technology like blockchain?
  • Japan currently taxes cryptocurrency gains at 55% and has considered lowering the capital gains tax for crypto transactions

With a rapidly aging population, low birth rate, and shrinking work force, it is hard to imagine Japan will ever recover from its economic slump. However, Blockchain technologies and investment could be precisely what the nation needs in order to stimulate inflation, and quite possibly, revitalize its economic heyday of the 1980s. In this episode of “Word on the Block,” Willie Pesek, Asia watcher and award-winning journalist, speaks with Angie Lau on the current state of the Japanese economy.

7 years ago, Prime Minister Shinzo Abe introduced an economic recovery plan to end deflation with the goal of increasing inflation by 2% within 2 years. Nearly a decade has passed, and the nation has yet to even pass the 1% mark. This begs the question, what steps can be taken to save the Japanese economy?

Pesek argues that although the Bank of Japan’s zero percent interest rates function well for quarterly growth, it does very little to incentivize Japanese consumers to spend their cash-based currency. If cryptocurrency were introduced at scale, the government could tax consumers that hoard their assets, thus incentivizing people to spend more. 

Consumers, of course, would have a natural aversion to this hypothetical government monitoring of crypto assets. Although the center of crypto innovation, Pesek reminds us that the country is still working on “striking a balance” between regulation and allowing cryptocurrencies to “maintain their true nature.” Currently, regulators are trying to provide clarity on how ICOs should be traded and conducted that would benefit both the user and the user and the economy as a whole.

Given that cryptocurrencies are classified as miscellaneous income, assets are taxed at a whopping 55%, serving as another hurdle for mass adoption. On a positive note, however, even in risk-averse Japan, some prominent lawmakers such as Takeshi Fujimaki are calling for lower capital gains for cryptocurrencies.

 In June, Osaka will host the G20 Summit where Japan plans to “literally hand out booklets” on regulation. For Pesek, this very well could be the golden opportunity for Japan to lead and move forward the conversation on Blockchain.

Full Transcript

Welcome to “Word on the Block,” the series that takes a deeper dive into the topics we cover on Forkast.News. I’m editor-in-chief and your guide today Angie Lau. And on this trip with me right now into risk-averse, regulation crazy, deflationary Japan (his words), is award-winning journalist, author and columnist Willie Pesek — a long-time Asia watcher based in Tokyo. We take a closer look at his Forkast.News column on how Bitcoin, or better yet, cryptocurrency can catalyze an economic recovery for a country that has yet to shake out of its last decades. 0:10

Good morning, Angie. 

Alright, good morning. Willie. We’ve talked about the malaise of Japan for a long time. We’ve both covered the story for years. And just to set the scene for our audience — bring us the lay of the land here — how has Japan struggled with its economy? 0:45

Well, we’re basically at the 20-year mark for the Bank of Japan having zero interest rates.

And about six years ago, six-and-a-half-years ago, Prime Minister Abe came in with a very aggressive and ambitious program to end deflation once and for all. A very big part of it was getting the Bank of Japan to move into uncharted territory. But here we are almost seven years later, and inflation is only a bit less than 1% to the 2% target. And so the BOJ is having what we would call, basically a traction problem at this point. And as someone who’s lived in Japan for about 17 years now — and I wrote about Japan when I lived in Washington, New York, as well — there seems to be this Einstein Insanity problem here. It’s the idea about trying the same thing over and over again, hoping for a different result. For 20 years now, Japan has been asking the Bank of Japan to do more. It has been devaluing the yen and basically that’s fine from a quarterly growth standpoint. But it hasn’t returned Japan to its 1980s greatness. It hasn’t defeated deflation. And it’s time to try something new, which is why this focus suddenly on digital currencies or cryptocurrencies is timely, and worth discussing.

Well, it’s fascinating, Willie. Because we have covered this story for a long time. And I do remember they were going to achieve 2% in two years. And we know that the effect of any bank, central bank, is the authority of its word. And if you believe that they can achieve it, then you follow that monetary policy and that guides investors, that guides your currency traders and all the rest. But if you lose credibility, I mean where is this central bank going? 2:20

I mean that really is the problem. And in fact this week, we had a BOJ meeting where Governor Kuroda talked about how the BOJ is very much on track for reaching 2%. But of course he admitted that it could be a couple more years before we get there. So by the time, Japan does achieve 2%, it could be 10 years or more from what they originally set that target. And Japan is a unique case because the demographics are very much in favor of deflation when you have a very old and aging population, shrinking workforce, and a very low birth rate. In many ways, that is a perfect recipe for deflation over inflation. So what Japan is trying to do is essentially lean against a very strong headwind. But they’re doing it in a very conventional ways that may have worked 10-20 years ago, and are having very little effect today.

 But how can cryptocurrency in your view change the course? 3:51

Well, one of the problems the Bank of Japan is having is it puts rates at zero, but that is not getting much traction because there are limits to what zero interest rates can do to influence consumer and business behavior. And back in about 2015, there was an economist named Andrew Haldane, who was talking about the need for trying something new, and he was talking about this barrier. It’s called the zero lower bound barrier. And it is the limit that central bankers are always trying to push through. You think about avionics and about trying to break the sound barrier. This is the monetary equivalent of that. And his concern was that paper money has limits. When you issue money and people are holding cash in their hands, you can’t force them to do much with it.

However, if you’re dealing with digital currencies, you can actually incentivize behavior in a very specific way. For instance, you can tax people who are hoarding too much savings or you can incentivize or reward people who are spending money. You also can use digital currencies at least in theory, to put greater spending power into people’s hands. One of the things that people have talked about here in Japan is — it sounds like socialism — but maybe what the BOJ needs to do is find a way to literally hand every Japanese household a certain amount of money and asks them to spend it.

And when they spend that money, they’ll get more. And a digital currency would probably be logistically the easiest way to do that.

It’s easy for a government or a body like that to track that spending. That’s the beauty of being able to use that technology. But what about the underside, the underbelly of that? So that’s fantastic. It sounds great as a tool for central bank. But tracking purchases the kind of privacy issue, that kind of big brother issue that comes about, is this something that people want when it comes to using a cryptocurrency that a nation has put out? 5:32

It’s a very good question. Japan is very much on the front lines of the tension between the desire for privacy. Japan is an interesting paradox I think at the moment because Japan is a place that is known for a lot of regulation — it’s a very risk-averse culture. However, at the moment it is a place angling to become the, if you will, “Bitcoin Training Center of the world.” Japan in many ways is one of the most forward-looking governments certainly here in Asia for harnessing the promise of blockchain technologies. And it is in the process right now of trying to find that balance between proper regulation, but also allowing cryptocurrencies to maintain their true nature. And that true nature as you well know, is a certain level of an anonymity, and that runs counter to banking norms. And so, I think Japan is an interesting test case. Japan is oftentimes a laboratory for the world on many fronts. One is demographics. Can you take an aging and shrinking population and still have a thriving economy? Despite that, can a country become more energy-dependent when nuclear power is becoming less appealing to its people? And I think when it comes to blockchain technologies, when it comes to cryptocurrencies, Japan is also an interesting test case. You have a process here in Tokyo over the last few months where regulators have tried to come up with new regulations to provide greater clarity on investor protection on how ICOs should be conducted. And they are trying to literally walk this tightrope between we want to maintain the purity, if you will, of cryptocurrency trading, and in ICOs, and the nature of the asset. But also harness the growth in the way that helps Japan’s economy without killing it.

And I’m not sure that Japan has come-up with that balancing act, yet. But later this year, actually 2 months from now, you’ll have the G20 meeting in Osaka. And at that meeting, Japan is planning to literally hand out a physical handbook about their brainstorming on the issue of regulation. So, I think the upcoming G20, in Osaka will be an interesting touchstone moment potentially for where Bitcoin is going in the year ahead. 

I’ll reinforce that. I was on a panel during Paris Blockchain Week Summit and I led the International Regulatory Cooperation Panel. And on the stage with me was OECD, IOSCO, CFTC. And I will say that Japan, as a nation, as a member of those organizations is really seen as one of the leaders in this space. So, people are watching the guidance from the regulatory realm, really will come down to nations and nations that are doing this sort of… I don’t even want to say, experimentation. But I guess it is because we haven’t seen it before. So, I guess when you set precedence it is, but precedents are being set right now, so we know that the mandate, the mission is there, we definitely know the motives are so great. But what about execution? Can Japan do it? I mean, BOJ promised 2% in two years? We’ve yet to see it, can they come through with thinking innovatively on cryptocurrency to save its economy? 8:31

Well, that is the question. It’s a great, interesting test case. But I do think you can argue that certainly in this region Japan is in some ways Bitcoin’s last best hope. I mean, look at what’s happening in China.

In 2017, the government basically banned trading ICOs. And now there is a move in China to perhaps ban all Bitcoin mining. And we can discuss the different driving factors behind that. But when you look at Japan and South Korea — they’re moving in a very different direction. These are two economies that are very important in terms of their size and their scale. But they’re also two economies that are trying to walk this balancing act between — I think Japan needs more and South Korea — they both need more risk capital. They also have both been deprived to some extent of the startup boom that you’ve seen elsewhere. It’s really fascinating to think that Indonesia has in some ways, created more unicorns than Japan and South Korea. It’s fascinating. But I think that Japan and South Korea both see the cryptocurrency space as their comfort zone potentially, a place where they can catalyze a massive startup boom, a place where they can increase tax revenues. But also a place where they can both hone their skills, if you will, as financial hubs. And so, I’m not sure if Japan will be the first to figure it out, but it’s interesting that they’re working on it.

Totally agree that they’re working on it, right? So, on one hand, absolutely, who doesn’t want that start-up culture to land in their backyard and generate the next wave of growth? That’s what Sony did, that’s what triggered the first wave of economic innovation and wealth for the country. They’ve squandered it away over the past 20 years. So, who doesn’t want that, right? But when you take a hard look at what the real-world tax rates are on crypto gains, I mean right now it’s considered miscellaneous income, which is what, subject up to 55% gains tax. I don’t know, Willie, if you’ve got some crypto assets in your portfolio, but that’s painful! How are you going to attract this startup culture, who’s very comfortable in the language of tokens and cryptocurrency assets, and then tax at 55%? 11:17

That’s a very good question. You know, it’s funny, back in 2014 when you had the Mt. Gox scandal here in Tokyo, there were jokes about Japan’s Finance Minister Taro Aso — who at the time was 75 years old — sitting down at Google and typing in, “What is Bitcoin?”

There’s been a very steep learning curve here. However, there are some lawmakers that are showing a bit of savvy. You have someone like Takeshi Fujimaki who is representative for the third largest opposition political party. Now, that does not mean that he has a seat at the table when Prime Minister Abe makes economic and financial decisions. But it is important and interesting that someone of his caliber is calling for lower capital gains taxes for crypto transactions, say at something that is close to 20%. That would make a lot of sense. And that is something Korea should consider as well. If you’re asking me, am I optimistic that Japan will be able to make a lot of these changes? I’m not really sure. Because the zeitgeist here in Japan, unfortunately has been to raise taxes on virtually everything.

So, if Japan were to create a space for a lower separate tax rate for crypto transactions, that would be a very interesting step in a different direction. But Japan is very big on this whole concept of special enterprise zones, being an anchor in Asia for a long time, you know about this concept from China to South Korea to Japan — special enterprise zones. Perhaps there is scope to create a special enterprise zone for the crypto space as well.

But I do think the tax rate issue is a very, very important one, and is something that needs to be discussed. The other problem too, as you mentioned before, is the issue of privacy. And Japan is a place where most recently, our minister of cybersecurity, admitted that he’s never used a computer. He has never used e-mail, and he had to resign over that, but that… 

Well know what, actually, that’s great cybersecurity because his emails never got hacked because he never used it. 14:27

That’s the secret to Donald Trump’s success, right? Never text, never email, and no one can bust you. But you know, Japan in some ways is again this odd paradox in that it’s the place where you would perhaps least expect it to be a leader in the crypto space. However, it is just that in Asia. And also the other paradox is Japan has been the site of the two most headline grabbing crypto scandals in history — in 2014 with Mt. Gox and 2018 with Coincheck. And yet, it’s still pushing ahead. So, I think give regulators here their due. They do deserve a bit of a pat on the back. It is surprising to me that they’re pushing ahead in the way that they are, but they are indeed. And again, with the G-20 coming up in June, they are looking to put the issue of cryptocurrencies, and related regulation on the discussion table.

And so that’s, I think, a big deal.

Well, you know what they say: Desperation is the father of innovation. So, it will be very interesting to see how Japan will regain traction — if it can. But G20, is on our calendar. Thanks for putting it on the editorial calendar for us, G-20 in Osaka where Japan will be releasing its own thinking and leadership on blockchain and cryptocurrency. It’s going to be fascinating to watch, and I know you’ll be watching it for us. Thanks, Willie! Awesome to talk to you. 

That was Willie Pesek, award-winning journalist and respected long-time columnist who’s done work for Barron’s, Politico, and Bloomberg. And it’s great to share this space with you Willie and bring this real-world perspective into blockchain and cryptocurrency. So, I’ll say Sayonara to you right now. That was Willie Pesek. 

You can find more of Willie’s columns unique only to Forkast.News. 

And that’s it from me for now. I’ve got to get back to the desk for another editorial meeting in a few minutes with our team. So, I’m going to sign off for now but thank you for joining us and I hope that help bring a greater perspective. Until next time, I’m Angie Lau, and this was Word on the Block. 15:31