ECONOMIC RESEARCH CENTERDISCUSSION PAPER
E-Series

No.E05−4

Recent Developments of Digital Cash Projects inJapan
byNobuyoshi Yamori
Narunto Nishigaki

April 2005

ECONOMIC RESEARCH CENTERSCHOOL OF ECONOMICSNAGOYA UNIVERSITY

Recent Developments of Digital Cash Projects in Japan

Nobuyoshi Yamori
Professor,
Graduate School of Economics, Nagoya University
Nagoya, 464-8601 Japanyamori@soec.nagoya-u.ac.jp

And

Narunto Nishigaki
Associate Professor,
School of Economics, Okayama University
Okayama, 700-8530 Japan
Phone: +81-86-251-7545
Fax: +81-86-251-7571
nisigaki@e.okayama-u.ac.jp

1

Recent Developments of Digital Cash Projects in Japan

Abstract

Most discussions and analyses regarding Japanese financial institutions during the 1990’s havefocused on the lingering effects of the collapse of the bubble economy, including huge
non-performing loans and large-scale bank failures. Thus, it is natural for foreign observers to fail toacknowledge that many Japanese banks and other non-bank enterprises have conductedforward-looking projects despite their financial difficulties. One of these projects has been todevelop digital cash technology and promote its usage. Because people in Japan tend to use cash fordaily payments more often than people in other nations, if the Japanese begin using digital cash
instead of traditional cash (i.e., Bank of Japan’s notes and coins), we anticipate that digital cash will
have a larger potential effect on the society and economy in Japan than in other nations. Efforts toestablish digital cash projects made discernible progress in the early 2000’s, and digital cash is morecommonly used now in Japan than in other IT advanced countries. This paper attempts to provide
an overview of the recent development of digital cash projects in Japan, and to discuss the issues
involved in the further growth of digital cash usage. This paper is organized as follows. Section 1
presents the introduction. In Section 2, we explain the historical developments of digital cash
projects in Japan. Section 3 discusses what factors led to remarkable progress in digital cash usage
in the early 2000’s. Section 4 describes the remaining issues that must be addressed for further
growth of digital cash usage. Finally, Section 5 concludes the paper.

Keywords (1) Digital Cash, (2) Electronic Payment, (3) Settlement Systems, (4) Hybrid
Smartcard, (5) Strategy and Policy, (6) Japan.

2Recent Developments of Digital Cash Projects in Japan

1. Introduction

Foreign observers who know that Japan suffered prolonged financial difficulties and an economic
slump in the 1990's may be surprised to find that the use of digital cash as a tool of payments or
settlements has grown rapidly in Japan. In fact, an increasing number of people in Japan use digital
cash for shopping. In addition, most Japanese people know the names used for digital cash, such as“Edy” or “Suica,” even if they do not use digital cash themselves. The Japanese have become
familiar with digital cash.
Only several years ago, financial economists thought that the diffusion of digital cash or electronicmoney would not easily occur1. The reason was that there were many obstacles to the spread of
digital cash. As we indicate in this paper, a significant number of those obstacles have been
eliminated by the government and through the efforts of many private enterprises. The main
purpose of this paper is to examine the factors affecting digital cash diffusion in Japan. For thispurpose, we would like to examine the history of various digital cash projects in Japan during thepast decade.
We would like to point out that many problems remain to be solved before further growth of thedigital cash business in this country can occur. One of the characteristics of the digital cash businessin Japan is that digital cash schemes are mainly managed by the private sector rather than the public
sector, and issuers of digital cash are not limited to banks. In other words, non-financial firms canissue “cash” now. In relation to such circumstances, it is necessary to consider what restrictions or
policies are needed to maintain a stable payment system.
This paper is organized as follows. Section 2 examines the history of digital cash projects in Japan
during the past decade. Section 3 examines the factors for the spread of digital cash in Japan.
Section 4 indicates the problems that must be solved for further growth and stability of the digital
cash system in this country. Section 5 presents the conclusion.

32. History of digital cash projects in Japan

2.1. Start-up period（1995〜1997）(1) High potentiality of information technology
The three years from 1995 to 1997 can be considered the start-up period of electronic money ordigital cash projects in Japan.
Remarkably, innovative technologies like multi-functional-type or remote-type IC-cards, which
made digital cash businesses in Japan superior to that in other countries in the early 2000's had
already been developed in Japan before 1995. It is well known among digital cash researchers thatTim Jones and Graham Higgins, who are the parents of "Mondex," the first smartcard-type digital
cash, entrusted the development of the card system to Japanese enterprises such as Dai Nippon
Printing, Hitachi, Matsushita Electric Industrial and Oki Electric Industry in 1991. These
corporations had researched and been developing IC-card payment technologies since themid-1980's. For example, Oki Electric Industry had been involved in developing the IC-card system“Apron Card” in Kyoto City since 1986, which became an actual usable card in April 1992, when
Mondex was still under experimentation2.

(2) Governmental initiative
However, it was governmental initiatives, beginning in 1995, that led nation-wide experimental
activities in electronic payment and settlements in Japan. At the initiative of the Ministry of Finance(MOF), the Bank of Japan (BOJ), Fuji Bank3, Nippon Telegraph and Telephone (NTT) and Fujitsu
Corporation organized a council for the introduction of digital cash in October 1995. The council
discussed whether there would be a strong demand for digital cash in Japan, how they would be
able to avoid forgeries and robberies, and how they would be able to prevent money laundering.
In 1996, many private Japanese banks launched their own digital cash projects. For example, in
April 1996, Daiichi Kangyo Bank, Sakura Bank and Asahi Bank4 introduced the use of a Smartcard
for digital cash in the Waterfront Area of Tokyo, as an experiment. Additionally, in October of thesame year, the Ministry of Transport (predecessor of the Ministry of Land, Infrastructure andTransport) together with Tokyo-Mitsubishi Bank, Sumitomo Bank and Sanwa Bank took part in this4

Waterfront Area experiment. The goal of the project was to develop an IC-card commuter ticket
system that would allow passengers not only to pay for an override charge, but also to buy food andother consumer goods in and around train stations. This technology afterward provided atechnological base for “Suica,” which is one of the most diffused and popularized types of digital
cash in Japan. The other digital- cash-related projects that started in this period are summarized inTable 1.
As other private sector projects, in February 1996, the Hitachi group, using their experiences
obtained in the United Kingdom, began to focus on developing their own digital cash technology inJapan. In competition with Hitachi, the Mitsubishi group decided to invest in the subsidiary ofMondex in Japan, which was established in June 1996 by the Industrial Bank of Japan, Sakura Bank,
Asahi Bank, NTT and Hitachi.

Table 1: Early digital cash projects in Japan (~1997)
Year

Month

District

1992

Apr

Kyoto City, Nishi-shindoContent
An IC-card system, “Apron Card,” was introduced for use along a local shopping street.

–nishikikai shopping street
1995

Oct

Metropolis, Tokyo

Daiichi Kangyo Bank and NTT Data Communications jointly developed an ATM that could
handle digital cash.

1996

Mar

Metropolis, Tokyo

Sakura Bank established a special section devoted to the development of digital cash
technology.

Apr

Water front Area,
Tokyo

1997

Daiichi Kangyo Bank, Sakura Bank and Asahi Bank began an experiment with the Smart-card
type of digital cash.

Jun

Ogaki City, Gifu pref.

An IC-card experiment was begun at a multimedia center “Soft-pier Japan”.

Oct

Komagane City, Nagano pref.

An IC-card system, “Tsuretette Card” was introduced for use on a local shopping street.

Nov

Ina City, Nagano Pref.

An IC-card system, “Iina-Chan Card” was introduced for use on a local shopping street.

Dec

Shizuoka Pref.

Apr

Metropolis, Tokyo

Shizuoka Prefecture organized a society for the study of Electronic Commerce.
Asahi Bank and Matsushita Electric Industrial introduced IC-card type digital cash on thecampus of Waseda University in cooperation with the University Co-op.

Jul

Mitaka City, Tokyo

Aug

Yamagata Pref.

An experiment of digital cash in the shopping street in front of JR Mitaka Station.
Nippon Arcadia Network, the third sector of the Prefecture, started an experiment using digital
cash and e-commerce.

Aomori Pref.

Michinoku Bank took part in the Business of Mondex International.

Sep

Fukuoka Pref.

An IC-card experiment in which Fujitsu took a leading part began.

Oct

Kobe CityAn IC-card experiment with multi-functions including prepaid, credit and online payments, wasinitiated.

Nov

Kanto-Koshinetsu
District

A new settlement system was established through the cooperation of fifty-nine universities in
the Kanto-Koshinetsu District collaborating with NTT Data and several city banks.
5

(3) Collaborations with overseas firms
The most remarkable development in the period after the second half of 1996 was that many
Japanese firms began collaborating with foreign firms to start digital cash projects. In August 1996,
Japan Information Printing, whose main business was to print prepaid cards, collaborated with
Switzerland’s Kaldak to produce IC cards. Moreover, in December, Hitachi took an order for an
in-bank settlement system from Westpac Trust, the largest bank in New Zealand5. In the first half of1997, Sumitomo Credit Service collaborated with Microsoft, Veriphon and GTE to develop a newelectronic settlement service system on the Internet, and this consortium of companies strove to be
the first to commercialize such a system in Japan6. GTE also established a new company with
Nomura Research Institute, NTT Mobile Communications and B.U.G.7, and they issued electronic
certificates for Sumitomo Credit and JCB in April 1997. Microsoft, on the other hand, competingwith GTE, suddenly announced its participation in the project with Sumitomo Credit, and it
collaborated with JCB to develop a new settlement system. Microsoft intended to overcome its rival
company, Netscape Communications, which had collaborated with VISA International and Toshiba
Corporation on digital cash experiments.

(4) General public attitude during this period
In the early stage of electronic money projects and e-businesses in Japan, consumers seemed
hesitant to use digital cash. According to a survey on the opinions of financial institutions’customers conducted in August 1996 by the Institute for Posts and Telecommunication Policy, 1/3
of respondents answered that they were worried about innovations in finance such as digital cash
and home-banking. Only 2% of respondents used home-banking services. Forty-one percent ofthem did not anticipate using home-banking services in the future, while 13% showed interest in
using the services. Also, an astonishing 69% believed that home-banking services were notnecessary, and 54% also said that they were not interested in using digital cash.
Moreover, according to a questionnaire conducted by Nihon Keizai Shinbun in October 1996, 74%
of respondents in the United States anticipated significantly greater use of digital cash during thenext ten years, compared to only 36% of Japanese respondents.
6

These results suggest that Japanese consumers in the mid-1990’s did not value the convenienceoffered by digital cash and were concerned about the security of information and payments
transmitted through new electronic settlement systems. To promote the general acceptance of digital
cash, legislative activities seemed necessary.

(5) Legislative activities
Policy makers had recognized that related laws and regulations should be reformed to correspondto new technologies. In May 1996, the MOF organized a committee to review the Prepaid Card
Regulations, and asked another committee to review the Foreign Exchange and Foreign Trade
Control Act, which allowed only authorized foreign exchange banks to deal with foreign exchangetransactions. The MOF then began to prepare for the revision of these laws and regulations.
Moreover, in the same month, the Center for Financial Industry Information System, which was anaffiliated organization of the MOF, concluded in its research report on electronic settlement that
digital cash should be made available to the general public as soon as possible.
In July 1996, the Financial Research Council and the Committee on Foreign Exchange and Other
Transactions, which was an advisory body of the MOF, established the Joint Conference on Digital
Cash and Electronic Settlement to examine how to diffuse digital cash. At the first meeting of themonth, it began discussion on revising the Prepaid Card Regulations and the Act Concerning
Acceptance of Contribution, Deposit and Interest8. Following the first meeting, the conference washeld every month. At these meetings, the necessity of a new legal infrastructure concerning digital
cash, the prevention of forgery and the improvement of users’ security were discussed9. However,on the 11th meeting in May, while some members still asserted that a new law that regulates whatfirms are able to issue digital cash was needed in order to prevent illegal transactions, others
claimed that such legislation would make it difficult for new firms to enter digital cash businesses.
The MOF and the BOJ in particular thought that they did not have to hasten new legislation,
because they believed that digital cash would not be widely used that soon in Japanese society,since the use of cash was so widespread and established. Of course, some argued that it was the lackof the legislation that had prevented the diffusion of digital cash in Japan. Whether this was true ornot, the beliefs of the MOF and the BOJ have been proven to be wrong10.
In September 1997, the MOF debated the creation of a new banking license (the Type 2 banking
7license), which would permit digital cash issuers to engage primarily in the settlement business,thus leaving traditional banks to engage in other businesses like deposit taking and loan offering.
The MOF intended to promote the new entry of manufacturers and distributors into the digital cash
business by introducing a laxer license. In the same month, the government established a researchsection on e-commerce in the Advanced Information and Telecommunication Society Promotion
Headquarters and held the first advisory meeting to discuss the following subjects:
1) Substantive laws and electronic confirmation.
2) Cipher technologies.
3) Means of electronic settlement such as digital cash.
Furthermore, the Committee for Financial System Research, at its general meeting late in the samemonth, decided to set up a conference to consider new legislation that would become necessary due
to the diffusion of digital cash and electronic settlement in the future. The conference discussed thestandards required of a digital cash issuer and an attestation institute as well as user protection.
However, the focus of the discussion was not on the legislation itself, but rather on preparing for
future legislation.
Subsequently, the movement of legislation became stagnant. As indicated in sections 3 and 4, it
was due to other efforts, rather than legislation, that led to the promotion of diffusing electronic
payment means (e.g., digital cash).

2.2. Period of large-scale experiments (1998~2000)

The last three years of the 20th Century were characterized by several large-scale experiments on
the electronic settlement system and digital cash. One of the reasons that large scale experiments
were necessary was to collect as much data on consumers as possible. Another important reason
was related to the intrinsic nature of money, the very object of the experiments. Digital cash cannot
be regarded as functioning like money until it circulates to a large enough extent. Thus, it is possible
to state that banks and firms would never obtain meaningful data about digital cash as long as
consumers use digital cash in a narrow laboratory.

8

(1) Large scale experiments in the Metropolis of Tokyo
The “Shibuya Smart Card Society” was begun on July 16, 1998 (and was completed at the end of
October 1999). This project was important for the following reasons. First, it was the largest digital
cash experiment in Japan in those days. Second, its experimental area was the center of the Tokyo
metropolis.
In this project, customers were able to use a smartcard named “Visa Cash” issued by VISAInternational at about eight-hundred locations (such as department stores and restaurants) within aradius of 1 kilometer from Shibuya Station. Forty-six institutions, including domestic city andregional banks, credit associations, manufacturers, credit card corporations and VISA International
took part in this project11.
The records of the project achieved by its completion were reported as follows: Visa Cash wasused 89,935 times, the total amounts of the transactions were 116.452 million yen, the cards werereloaded 12,808 times, the total amount of reloading was 103.959 million yen, and the number of IC
cards issued was 120,62612. It is difficult for us to judge only by these results whether theexperiment was successful or not. However, it is at least possible to say that the Shibuya Project did
not immediately and directly lead to practical businesses. For example, Tokyu Department Store,
one of the participants of the project, had already announced in February 1999 that it would
dismantle all of the exclusive terminals at the time of the project’s completion. Furthermore, except
for internal credit card corporations and a small number of city and regional banks, most financial
institutions and all manufacturers proclaimed their intention to withdraw from the system by the endof the project. It is possible that the introductory costs and maintenance costs proved to besignificant expenses for the participants, and offset the increase in income. Nevertheless, VISAInternational and other several domestic financial institutions likely gained useful data andoperational experience from this experiment.
In parallel with the Shibuya project, another large digital cash experiment in the metropolitan area
named “Shinjuku Super Cash” was implemented. Twenty-four private financial institutions incooperation with NTT established an incorporated body called the “Super Cash Council” and began
an empirical experiment with 100,000 monitors at department stores, convenience stores, gas
stations and other stores in the Shinjuku area. Regrettably, without reporting on its results, theexperiment finished as scheduled in May 2000.
9

(2) The MPT’s project in Saitama Prefecture
Before these large experiments within the Tokyo Metropolitan area began in October 1997, theMinistry of Posts and Telecommunications (MPT) began its five-year experiment on a new type ofdigital cash developed by the BOJ and NTT. The intention was to use digital cash at both real andvirtual malls. City banks (including Asahi, Daiwa and Tokai Bank), the Zenshinren Bank,
Shinchosha (a large publisher), and several telecommunication companies (NTT and KDD)
cooperatively participated in this project. This experiment was first begun at virtual malls, and in
February 1998 the real side experiment began in Ohmiya City (present Saitama City), Saitama
Prefecture. Initially, only fifty-five stores around the JR Ohmiya Station participated. In thisexperiment, customers were able to use the IC-card both as an ATM card for Postal Savings and as aprepaid card at department stores, convenience stores, large chain stores, ticket slot machines at the
JR Ohmiya Station and at public telephone booths.
The MPT experiment in Ohmiya City has steadily expanded its scale and range of businesses since
its inception. For example, four domestic credit card corporations (e.g., JCB) expressed the desire toparticipate in the experiment in October 1998, and in February 1999, MPT and VISA International
came to an agreement that they would integrate the empirical experimentation in Shibuya and Kobe
City into the project in Ohmiya City. According to an interim report in August 1999, one and a halfyears after the project had begun, the practice area had been expanded to neighboring cities (Urawa
and Yono City). Two-hundred eighty-six stores participated in this project, and about 900 terminals
were equipped to handle the cards. Sixty-four thousand cards were issued, and the total transactions
amounted to 103.0 million yen.

(3) Other large scale experiments during this period
The other large scale digital cash projects were Smart Commerce Japan in Kobe City, mentioned
in Table 1, and a new settlement system established by the cooperatives of 59 universities in the
Kanto-Koshinetsu District collaborating with NTT Data Telecommunications and city banks such as
Tokyo-Mitsubishi, Daiichi-Kangyo and Fuji. The students at these universities could use theIC-card as digital cash for payment at shops of the University Co-ops. In this system, a student
could electronically transfer funds from his bank account to his IC-card through a terminal (a10special ATM) that was installed on the campus, and could use the card as a prepaid card whenbuying writing materials and books, food, and other items. A peculiarity of this card was that it
could also be used as a student identification card13.

(4) Provisional evaluation for these large scale experiments
Making a final evaluation for the large-scale projects mentioned above is impossible until digital
cash diffuses sufficiently in cash-oriented Japanese societies. Nevertheless, we think it possible topoint out the following at the present stage;
1) It was premature to conclude that it was possible for a nationwide diffusion of digital cash tooccur based on the success of an experiment, as long as the available area of digital cash was
limited to one or several cities (or wards, which are urban areas).
2) Cost problems could not be overcome by enlarging the size of a project.
However,3) In the sense that these projects together with other small and medium scale experiments could
provide opportunities for examining various new and applied technologies, they might possibly
contribute to the commercialization of the digital-cash-related technologies.

(5) Support by the Government
During the period 1998~2000, the Japanese Government did not reform legislation, but they did
begin to support IC-card related industries to develop an electronic settlement system in earnest.
The Ohmiya project by the MPT was one such effort.
In August 2000, the IT Revolution Sub Committee affiliated with the Diet Members' Union of the
Liberal Democratic Party (the LDP, which was the political party in power in Japan) concerning
informational industries proposed that IC-card standardization among ministries should be
progressed in order to manage individual information by a unified computer system, and that the
obligation of document issue had to be exempted for electronic commerce transactions. In October
2000, the Political Responsible Persons’ Conference of the Government proposed that public
services, including education, transportation, medical care and other administrative services, be
provided through a light-speed Internet circuit, and that IC-cards would be a useful method in thistype of society. These proposals encouraged the government to realize “Electronic Government
11Planning”14 by the end of fiscal year 2003.
The other governmental efforts made for the diffusion of electronic settlement and digital cash arelisted in Table 2, as are the efforts made during other periods (before 1998, and after 2000). To
varying degrees, these efforts seemed to have led to the full-scale practical use of digital cash in theprivate sector with a time lag of several years.

Table 2: Governmental Contributions Related to the Diffusion of IC-card and E-money
Subject
Year
Content of Activity
The Government or 1997 Establishment of a research section on e-commerce in the Advanced Information and
LDP
Telecommunication Society Promotion Headquarters. (Sep)2000 The sub committee of LDP Diet Member’s Union for IT industries proposed the standardization of
IC-cards among ministries. (Aug)The Political Responsible Persons’ Conference of the Government gave the outlines of preparations torealize the Japanese version of the IT revolution. (October)2001 Establishment of the Headquarters on IT Strategies. (Jan)“E-Japan Planning” with over-priority was suggested. (May)2002 Three bills related to Electronic Government and Local Government were passed by the Cabinet. (Jun)
Ministry of Finance1995 Organization of a council with private banks for the introduction of digital cash. (Oct)1996 Established the Joint Conference on Digital Cash and Electronic Settlement. (Jul)Started to revise the Prepaid Card Regulations and the Act Concerning Acceptance of Contribution,
Deposit and Interest. (Jul)1998 “The Report of the Joint Conference on Digital Cash and Electronic Settlement”. (Apr)Ministry of Justice
1996 Established two small committees for studying electronic commerce. (Dec)
Ministry of International 1998 Spent 42,500 million yen on 158 topics adopted in “the Developing and Collaborating Businesses ofTrade and Industry
Advanced Information System”. (Dec)(~2000)2000 Set up a joint project with the European Commission for establishing standardized methods for a next
Ministry of Economy,
generation IC-card system. (Jun)
Trade and Industry(2001~) 2001 Began online issue of an electronic autographed public document. (Jun)
Ministry of Transport
1996 Started supporting the development of an IC-card commuter ticket system. (Oct)(~2000)2001 Developed a multi-functional IC-card available both for getting on public transportation and for
Ministry of Land,
shopping. (Nov)Infrastructure and2003 An empirical experiment was begun on the E-Check-in System. (Jan ~ Mar)
Transport
Achieved development of a system in which a potable telephone with a built-in IC was available for(2001~)
getting on trains and for ETC (Electronic Toll Collection System) of a superhighway.
2004 Started an empirical experiment for an IC-card commuter ticket in east Asian countries. (Feb)
Ministry of Welfare
2000 Began to examine changing from paper-based health insurance certificates to IC-card versions. (Apr)(~2000), Ministry of
Embarked on the diffusion of an IC-card as a health insurance certificate and as a resident's card. (Oct)
Health, Labor and2003 Began a model business for care insurance certificate IC-Cards. (Sep)
Welfare (2001~)
Ministry of Posts and 1997 Started a five-year experiment on a new type of digital cash available for both real and virtual malls,
Telecommunications
but at the beginning only in virtual malls. (Oct)(~2000)1998 Extended its previous digital cash experiment to real malls in Ohmiya City. (Feb)12

Japan Post
(2003~)

2000 Embarked on joint development of a system in which a portable telephone could be used as an IC-card
terminal, in collaboration with several manufacturers. (Mar)2003 Japan Post started to issue Postal Saving Cards loaded with Edy’s Functions. (Aug)Ministry of Internal 2002 Revised the ministerial ordinance related to radio wave laws and abolished business licenses for the
Affairs andremote type IC-card. (Jul)Communications

2.3. Period of real commercialization (2001 ~ Present)

With regards to electronic settlement and digital cash, we can regard the period since 2001 as atime of commercialization. We would like to explain several representative cases below.

(1) The appearance of the Japanese original digital cash “Edy”
One of the most remarkable cases is that of “Edy”. It does not mean an IC-card, but an electronicvalue which can be filled up using various kinds of IC-cards and potable telephones with built-in
ICs that adopt a non-touching (or remote) technology method called “FeliCa,” which was developedby Sony. The empirical experiment of Edy was begun at Gate City Ohsaki in front of JR Ohsaki
Station in July 1999, and the genuine commercial service of Edy began in November 2001 after
several successful experiments were conducted. The management and promotion enterprise of Edy
is Bitwallet, which is now financed by sixty-one (initially eleven) corporations such as Sony and
NTT Docomo Telecommunications.
Edy service providers consist of Bitwallet as a core enterprise, seven IC-card issuers, two card
printing makers, thirteen value issuer firms (e.g., credit card corporations and city banks),
thirty-seven technical operating firms which provide Edy terminals, twenty-seven solution firms
which supply vending machines that can accept Edy, and more than 13,000 chain stores, including
online shops, as of the end of December 2004. Chain stores in all prefectures now accept Edy. The
categories of business have also been extended to various types of industries, such as food and drink,
shopping, amusement parks and arcades, medical clinics, and other places. A report released by
Bitwallet stated that by the end of December 2004, about 6.8 million IC-cards (including cellular
phones) that can use Edy had been issued, and the number of transactions using Edy had gone up to
about five million per month. From the Shibuya Smartcard Society’s experience, where the average
13per-transaction amount was about 1500 yen, the amount of use per month may be about 7.5 billion
yen total.
At present, Edy still remains a closed-loop system, not an open loop one15. All information
concerning the transactions settled by Edy has been designed to be concentrated in an operational
center of Bitwallet, and it is impossible to exchange Edy values freely among customers, stores andfirms. However, there is an important difference between Edy and former closed-loop digital cash
systems. Edy can be purchased on credit, and Edy cards can be charged in exchange for cash; thus,
a bank balance equal to the amount of payment by Edy isn't necessarily needed.

(2) Suica: digital cash evolved from a carfare IC-card
Another widespread digital cash IC-card in Japan is called “Suica,” which has already been
mentioned above. There are two kinds of Suica, a Suica-Io-Card (ticket), and a Suica Pass. East
Japan Railway issues these cards. They were introduced at 424 JR stations in and on the outskirts of
the Tokyo Metropolis in November 2001, after several empirical experiments were conducted in theTokyo Waterfront Area. The number of Suica holders has increased from 2 million (two months
after the introduction) to more than 10 million in October 2004. The reasons for the diffusion ofSuica are as follows. First, since December 2002, the card has been available outside themetropolitan Tokyo area (for example, in the Sendai district) and at many railway and Shinkansen
stations. Second, the card has also been available on the Tokyo Waterfront Railway and the Tokyo
Monorail stations since March 2002. Therefore, it is very convenient for people in Tokyo to use
Suica. Third, since August 2004, Suica can be used as an ICOCA, which is a similar IC card ticket
and commutation ticket issued by West Japan Railways (e.g., in the Osaka District).
Of course, if Suica was merely an IC-card corresponding to the transport system, it would never beable to compete with Edy. However, besides functioning as a ticket and a commuter ticket, Suicacan be used for financial transactions. In July 2003, “View Suica”, which is a hybrid Suica card,
was introduced, making it possible to credit the deficit in a carfare IC-card. And in March 2004,
Suica became available for shopping at station stalls and restaurants in station yards. Moreover,since September of 2004, the card can be used to pay for goods at convenience stores on the street.
The number of Suica cards issued with a digital cash function (other than carfares) was up to4,430,000 at the end of October, 2004. As of the same time, Suica could be used as a ticket or a14commuter ticket at 847 stations of East JR, West JR, the Tokyo Waterfront Railway and the Tokyo
Monorail, and as digital cash at 653 stores such as NEWDAYS or Family Mart. East JR intends toextend the use of the card to the Niigata area (within the 2005 fiscal year). In rivalry with Edy,
“Mobile Suica,” which uses a portable phone as a loading device, is also going to be introduced(within the second half of FY 2005)16.
The way in which East JR expanded the usage of IC cards is instructive for international readers.
JR first introduced the IC-card ticket (Suica) to its customers to show them how convenient anduseful the card could be, and once that had occurred, East JR added digital cash functions to theSuica.
Finally, we have observed that the scales of the commercialized projects (the Edy and Suica) havealready become much larger than any former experimental projects (see Table 3).

Table 3: The sizes of digital cash projects in Japan
Number of Issue

Amount of use (1000 yen)

Experimental

Shibuya Smartcard Society

120,626(98.07~99.05)

116,452(98.7~99.5)

Projects

MPT project (Ohmiya City)

64,000(98.02~99.08)

103,000(98.2~99.8)

Smart Commerce Japan (Kobe City)

24,468(97.10~98,04)

56,000(97.10~98.4)

Commercialized

IC-card corresponding to the Edy

6,800,000(01.11~04.12)

7,500,000(per month)

Projects

Suica Card with prepaid function

3,070,000(01.11~04.06)………

(Note) *The data concerning the amounts used in commercialized projects are as of the end of 2004.
**The amounts used in commercialized projects were estimated by the authors.

(3) Governmental activities related to IC-card since 2001
In January 2001, the government started up the IT Strategy Headquarters, and in June of that year,
the headquarters settled on the E-Japan Emphasis Plan aiming for the establishment of the mostadvanced IT nation within five years. The following applications of IT were planned. The
government provided several IT model districts with a forefront electronic infrastructure. In those
districts, 1) an election would be conducted by electronic ballot, 2) people would be able to receive
electronic medical services (for example, receive a diagnosis via the Internet), 3) the managementof emigrants and immigrants in the airport would be easily completed with IC cards, and 4) a15

system in which people can operate home appliances by remote control using a cellular phonewould be introduced17. The Cabinet Council introduced three bills concerning the completion of
paperwork electronically for the government and municipality, making it possible to fileregistrations of one’s marriage and final tax returns online, and to obtain a copy of one’s resident’s
card from one’s PC.
Table 2 shows other governmental efforts made during this period. The government efforts listed
in Table 2 include governmental and administrative activities which might not seem to have any
direct relation to digital cash. However, it is notable that these efforts were important in consideringfactors that have encouraged broad use of digital cash. Various kinds of IC-cards, including digital
cash smartcards, have been diffused due to the development of hybrid (or multifunction)technologies.

3. The factors for the spread of digital cash in Japan

3.1. Public sector’s leadershipAs stated in the previous section, the rapid spread of digital cash in Japan has been highly
dependent on the overall support provided by the national and local governments. The national andlocal authorities assisted in diffusing IC-cards, but not in promoting electronic settlement by digital
cash, which is just one of the information technologies. However, because the government provided
support for the entire IC-card field, the diffusion of digital cash occurred as a result. One of thefactors in this diffusion was hybrid technology which brings about the spread of digital cash
together with other IC (card) usages such as for transportation, medical treatment, andadministrative services. In addition, another factor is the fact that the increase in the demand to use
IC cards in new ways has significantly reduced the production costs of IC-cards. Therefore,
financial institutions and other companies have found it easier to introduce IC technologies (e.g.,
electronic settlement) into their businesses. We describe this in detail in the next sub-section.
However, the entire support of the public sector would have resulted in failure if the private sector
had not made its own efforts. First, many private enterprises had already accumulated experiences16and advanced technologies related to electronic settlements before the participation of the public
sector in the field (i.e., in 1995, as mentioned at the head of section 2). Examples of Japaneseoriginal technologies concerning electronic settlements are listed in Table 4. Second, private firms
in Japan have made efforts to develop electronic settlement technologies to better serve thecustomers and market.

Table 4: Original Japanese technologies related to electronic settlement
Year

Technology nameCompanies or governmental
bodies developed by~1994 A remote-type IC-card
Matsushita Electric andOthers1997 An IC-commutation
Ministry of Transport,
ticketOthers~1997 A common-card both in VISA International,
real and virtual malls
Toshiba and others~2000 Cellular phone withNTT Docomo, Sony anddigital cash function
othersContent of system
It can remotely read and write on an IC card.
Allows passengers to pay for an override charge
along with various purchases.
It is an IC-card available both in real malls andvirtual malls.
Digital cash functions are built into a cellular
phone.

3.2. Decrease of IC card issue costs: innovation and expansion of the market

As indicated in the example of the Shibuya Smartcard Society, the introductory costs andmaintenance expenses of the electronic settlement system were major obstacles to the spread of
digital cash. Of all such costs, the cost of issuing IC-cards was especially expensive. When
Ogaki-Kyoritsu Bank introduced IC-card digital cash as an experiment at Soft-pier-Japan (Ogaki
City, Gifu Pref.) about ten years ago, the issue cost per IC-card was about 1,300 yen, ten times thecost of a standard cash card18. Now, the issue cost per IC-card has fallen below 150 yen. Therefore,
it has become much easier for financial institutions to begin electronic payment services.
Needless to say, the innovations in the technology have contributed a great deal to the increasinguse of IC-cards during the past decade. However, as mentioned above, the expansion of the IC-card
market has also contributed a great deal to the decrease of IC-card issue costs through a scale merit(i.e., the reduction of manufacturing costs by mass production). Currently in Japan, there are six
fields in which IC-cards are in demand: 1) finances, 2) traffic and transportation, 3) administrative
tasks, 4) identification (ID) cards, 5) communications, and 6) medical care. Among these, the areas17

related to payment-and-settlement are 1), 2) and part of 6). But we have to consider the fact that byslight technical changes, an IC card production line can be corresponded to the functions in all ofthese areas. Therefore, even if a demand increases not in the area of digital cash but in other field of
IC-card, through a scale merit concerning IC cards’ common components, the issue cost of digital
cash could be reduced as the result. In other words, if the demand for IC cards in any field increased,
the issue cost of digital cash would decrease.

3.3. What has changed by the introduction of the Edy and Suica cards?

At present, there are two types of digital cash systems in Japan. One is a regional promotion typebased on a local area or a local shopping street, which can only be used on a certain street or certain
shops. The Apron Card for the Nishi-shindo-nishikikai shopping street (Kyoto City) and two
smartcard systems in Nagano Prefecture are typical examples of this type of digital cash system.
This system is self-concluded within the consumer's living space, and has been commercialized on
their terms. A main purpose of this system is to prevent outflows of customers to large-scale shops
in the suburbs or to the nearest large cities. Therefore, these projects seem to have reached thisinitial goal, at least to some degree.
However, Edy, Suica and ICOCA are used in larger areas. The plan is for this large-area typesystem to be used not only in Tokyo and Osaka, but throughout the entire nation. Although thesesystems have not been open-looped yet, their availability over the whole country will undoubtedly
improve their general acceptability, which is one of the most important characteristics of money.
Therefore, the wider the regions where one can use these currencies, the more people would want to
use them. For example, if a businessperson travels around the whole country, he or she would be
more likely to use digital cash if it is available from Hokkaido to Okinawa.
It is relatively easy for firms or stores to introduce Edy into their business because of its
correspondence to all IC-cards or cellular phones that use the FeliCa method. However, theadvantage of Suica (or ICOCA) is that it is linked to the JR rail system. The success of Suica is dueto the East JR’s strategy for covering all places that businesspersons often visit.

3.4. Conveniences that have arisen by multifunction (or hybrid) types of Smartcards
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Customers will never accept digital cash if they are unaccustomed to using it. Only after they
acknowledge that its usefulness is greater than that obtained from cash or a credit card will theywant to use it. Thus, whether digital cash offers greater advantages than cash or credit cards do is
crucial for the diffusion of digital cash.
For example, the three regional type digital cash systems mentioned above were commonly
accompanied with a point service function in addition to an ordinal prepaid function. A typical point
service for shopping is to give points to customers who buy something with digital cash. For
example, a customer obtains one point when he purchases something costing one-hundred yen. In
the Apron Card and other systems, a customer's purchasing information is automatically converted
into equivalent points, and these points are added to the prepaid value of the IC-card. For the Apron
Card, 4 yen points (four times the usual number of points) are given for the purchasing price of
one-hundred yen. Thus, the point service function gives premium value to digital cash.
Therefore, the following inequality determines whether digital cash is used or not;Utility from using cash (or credit card) <Utility from using digital cash + Premium value given to digital cash usage

When this inequality is satisfied, the customer will be willing to use digital cash. The premium
makes up for the costs to customers for digital cash usage, costs which include inexperience,
operational trouble and uneasiness. The premium makes customers feel payments by other thandigital cash causing losses. The premium value makes customers feel that if they pay for things
using actual cash, a credit card, or by some other means, they'll suffer economic losses. It is
possible that if the Mondex (U.K.), the first IC-card type digital cash in the world, had had a point
service function (without sticking only to a prepaid function), it would have become a more popularcard worldwide. Mondex’s failure was inevitable, because the inequality was not satisfied because
Mondex did not offer any premiums to customers.
Similarly, E-Cash (Digi-Cash Co., U.S.), the first network type digital cash in the world,
committed the same kind of failure. It competed with credit card companies by using superior
encryption technology on the Internet. When the bankruptcy of Digi-Cash Company was declared19

in November 1998, a journalist analyzed the cause of the failure as due to the following. As Internet
consumers became accustomed to using credit cards for online shopping, the micro-payment market
became smaller and smaller19. However, this analysis only presented one side of the facts. The more
important cause of the failure is that a customer could use a credit card both in real shops on thestreet and in virtual malls on the net, while she or he was not able to use E-cash other than for
online shopping. Therefore, despite the advanced anonymity provided by E-Cash, customers knewthat the utility of using E-Cash was much less than that obtained from using a credit card. In Japan,
hybrid technologies have been applied on synthetic IC-cards that include credit, debit and cash-cardfunctions together with a prepaid function available both at real stores and online. Japanese firms
collaborating with the public sector have selected a symbiotic relationship rather than a competitive
one in this respect. An interesting fact is that credit card companies have mainly promoted hybrid
smartcards in Japan.
Currently, nationwide type cards function as credit, debit and cash cards. However, regional
promotion type cards have an administrative function in addition to a point service function (seeFigure 1). In sum, these two types of digital cash have evolved independently in Japan.

Figure 1: A comparison of functions in each digital cash system＊The Mondex (1992〜)
prepaid function（sticking on single function）＊E-Cash(1994〜)
Internet payment function（sticking on single function）＊The Apron Card (1992〜)①prepaid function＋②point service function＊Tsuretette & Iinachan Card (1996〜)①prepaid function＋②point service function③administrative card function（1998〜）＊Smart Commerce Japan in Kobe (1997.10〜)①prepaid function＋②credit function③net payment function (1997.12〜）＊MPT's Project (1998.2〜)①prepaid function＋②cash card function③debit function＋④credit function（2000.8〜）

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3.5. Innovations in techniques

Hybrid and other new modes of smartcards have become available due to various technologicalinnovations. The technologies have advanced rapidly. Recently, for example, a new system wasdeveloped that makes it possible to transfer money directly from an ATM to a cellular phone. In
addition, various ID (identification) techniques such as fingerprint attestation, face attestation, iris
attestation, and vein attestation have been developed in order to improve consumers’ reliance onelectronic settlements,
In the World Congress on Information Technology (WCIT) 2004 held in Athens, the electronic
tender system applied in Yokosuka City in Kanagawa Prefecture as a public sector and East JR’s
Suica as a private sector were awarded the IT Prizes of World Information Technology and Services
Alliance (WITSA). Because the prize is reportedly the most important in the IT field worldwide, theJapanese public and private sectors were recognized as having the highest level of smartcard
technologies.

3.6. Summary

In this section, we consider the factors that have contributed to the rapid diffusion of digital cash in
the past few years in Japan. The cooperation between the government and private companies has
been the most important factor leading to the diffusion of digital cash. In addition, the following
various factors also contributed to the rapid diffusion.
1) The introductory costs and operational expenses of electronic payment systems have been
dramatically reduced, due to both improvements in manufacturing technologies and theincrease in the demand for IC-cards in various areas beyond financial fields.
2) Since the appearance of Edy and Suica, digital-cash-available regions and stores have
expanded with increasing speed.
3) The development of hybrid technologies has made digital cash more convenient.
4) Remarkable innovations in attestation technology have improved reliability for consumers.

21

4．Unsolved problems to ensure a stable digital cash system

4.1. What are the remaining issues?

What problems will come to light after the spread of digital cash and other consumer electronic
settlements? In this section, we consider the problems that remain to be solved to ensure stable andreliable digital cash system.
First, we should consider the problems that used to be obstacles to the diffusion of digital cash but
have been forgotten because of the real spread of digital cash. In fact, these problems were notsolved, but rather avoided. For example, as mentioned in the previous section, the costs of digital
cash usage have been reduced and the range of regions and stores where one can use digital cash
and its conveniences have significantly increased. As a result, the commercialization of the digital
cash system has greatly progressed. However, have security and privacy problems been eliminatedsufficiently by the progress of ID techniques or remote-type IC-card technologies? Of course, thesetechniques would, to some extent, contribute to solving these problems. But remote technologies
can be abused (individual information and the value of money can be stolen remotely). Additionally,
ID technologies in general are also not perfect, and camouflages by various means are still possible.
Furthermore, there still remain other problems, such as money laundering and tax evasion. Thus,
further improvements of the technologies in this field are needed, as are solid restrictions.
Second, we should not forget confidence problems regarding digital cash issuers. Edy, Suica andother types of commercialized digital cash in Japan are all secured. The values are tentatively
guaranteed by the exchange of bank deposits or the cash equivalent to the digital value. However, it
is possible that an event occurs in which digital cash as a whole might lose public trust and would
trigger runs upon a digital cash issuer. For example, the issuer's failure and mechanical troubles
which make digital value information destroyed or unreadable may provoke runs on the issuers. A
mechanical trouble, although not a very serious one, actually occurred. On October 26, 2002, anautomatic ticket machine collected 67,380 yen in total from 290 Suica Pass users by mistakes.
Finally, a money supply controllability problem accompanied with the diffusion of digital cash isof concern to the central bank. When the amount of circulation is relatively small, money supply
controllability is less likely to be damaged. But it is impossible to disregard this problem once22

electronic money becomes widely used. It is necessary to examine the controllability problem
before it is too late.

4.2. Further government efforts

As shown in Table 2, legal reforms by the government were made during the start-up period(1995~1997). However, since 1998, the government has been inactive in passing legislation. A
five-year gap in administrative action in this field suggests that the primary policy of thegovernment was to spread smartcards.
The MOF published the Report of the Informal Gathering for Discussions on Digital Cash andElectronic Settlement. Its primary goal was first to strive for the development and diffusion ofelectronic settlements and digital cash. The report recommended that legal and institutionalframeworks be structured to encourage private firms to design and develop a digital cash system as
freely as possible. The report also maintained that it would be desirable to prepare new laws to
enable various firms other than depository financial institutions to issue digital cash. The Japanese
government’s aggressive policy contributed a great deal to the diffusion of electronic settlements allover Japan. However, we would like to note that the Japanese approach stood in contrast to theapproach of the European Central Bank during the same period20. The ECB claimed that the issuerof digital cash should be limited to banks, whereas the MOF listed only two points as requirements
for a digital cash issuer: 1) financial soundness and 2) capabilities in the technique required and in
the business practices necessary. In fact, the MOF did not submit the Digital Cash Bill to the Diet.
Therefore, no legislation regarding digital cash issuers has been passed.
In 2003, the Ministry of Internal Affairs and Communications and the Ministry of Economy, Tradeand Industry began to study a defense plan to protect confidential information stored in an IC card.
In 2004, the Financial Services Agency (FSA) also began to consider a user protection plan. For
example, a digital cash issuer would be obligated to hold cash and deposits more than half of theamount of the outstanding values of the digital cash.
It is not clear how the BOJ as another financial supervisory authority evaluated the recent
diffusion of digital cash. Of course, as long as the main types of digital cash in the country are theclosed-loop type, it is possible to think that the monetary policy will not be influenced so soon and23

so severely, no matter how widely digital cash use will spread. However, the BOJ has to take thepossibility into consideration that types of digital cash like Edy and Suica will open their loops after
they become as popular as cash. In preparation for “that time", the BOJ must consider the following
points:1) Qualification for digital cash issuers, to ensure that the digital value is backed by cash anddeposits.
2) Enhancement of the statistical data concerning digital cash.
3) Various simulations of the trends in the future.

5. Conclusion

In this paper, we have examined the factors involved in the recent spread of digital cash and the
problems with digital cash projects in Japan that still remain to be solved. First, we took into
account the history of digital cash projects of Japan during the past decade, ranging from the initial
experiments to the recent commercialization efforts.
With regards to factors accelerating the diffusion, we found that the government did not pass newlaws, but instead supported the experiments and commercialization. At the same time, we found thatthe manufacturing costs of smartcards were significantly reduced through expansion of IC-card
markets and technological improvements. Furthermore, the most fundamental causes for diffusionthat we pointed out are (1) increasing convenience of digital cash usage, (2) expansion of available
districts of digital cash, (3) innovations in ID technologies, and (4) close cooperation between the
public and private sectors.
Concerning the remaining issues, we enumerated consumer protection problems, confidence
problems of digital cash issuers, the money supply controllability problem if digital cash turns into
an open-loop system in the future, and other criminal issues such as money laundering.
The Japan of today is not necessarily a world leader in all IT industries. However, in the digital
cash field, Japan is one of the most advanced countries in the world. Thus, if Japan is to become a"good model" for other countries in this field, policy efforts must be made to remove the various
factors destabilizing the digital cash system.
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Acknowledgement
The authors appreciate Professor Kurihara for his valuable comments. Yamori also appreciates
Japan Society for the Promotion of Science for its financial support (Grant-in-Aid for Scientific
Research).

Notes
1

Yamori and Nishigaki (2000) reviewed these opinions.

2

Of course, at the same time, some digital cash projects in other developed countries were used inreal economic transactions. For example, an electronic settlement service through the Internet wasinnovated by First Virtual in the United States, and IC-card type digital cash in Finland andDenmark, as well as in other countries, were in use before 1995.
3

It was one of the largest private banks in Japan. It was merged into the Mizuho Financial Group

in 2000.
4

Like Fuji Bank, these banks were also major private banks in Japan. All of them were merged

into mega financial groups later. Daiichi Kangyo and Fuji were merged into the Mizuho FG. Sakura
Bank was merged into Sumitomo Mitsui Banking Corporation in 2001, and Asahi Bank joined theResona Group in 2002.
5

These facts suggest that many Japanese industrial firms had already developed innovativetechniques that were necessary for electronic finance.
6

This system consisted of two parts. The first part involved electronic attestation (i.e., inputting

one’s credit card number when ordering goods or services online). The second part involved credit
card settlement (i.e., sending electronic information, such as the credit card number, to the credit
card company). The method of settlement used was the “SET” system, upon which VISAInternational and Master Card had previously agreed.
7

A maker of PC-related commodities in Sapporo City (Hokkaido).

8

The regulation, abbreviated to “shusshi-hou”, prohibits anyone from accepting deposits without alicense. Therefore, if a non-bank issues digital cash in exchange of traditional money, the issuing ofdigital cash might be regarded as deposit taking, and therefore illegal for non-bank institutions.
25

9

The conference participants discussed in January who should be an attestation institution thatproves the counter party’s identity, and in March it focused on the legal rights and duties inelectronic payment.
10

As another legislative action, in December 1996, the Ministry of Justice established two small

committees to study electronic commerce. The committees began to discuss digital cash systems
and to consider how to revise the related civil and commercial laws.
11

There were four types of smartcards: the exhaustible type, repeatable type, IC prepaid and credit

card combined type, and IC prepaid and bank ATM card combined type.
12

See http://www.edit.ne.jp/~arita/jec/smartjapan.html.

13

However, it did not function outside campuses.

14

It was the plan that the national and local governments would process their administrative affairs

through digital or electronic systems.
15

Closed-Loop Type Digital Cash System is a system in which a digital cash issuer (an originator)

should transfer the same amount of money as the sum paid by a digital cash user at a shop to thedeposit account of the shop. In this system, the digital cash value exchanged for cash or deposits
must be flown back to the issuer through a member bank after each transaction. Open-Loop Type
Digital Cash is a system in which digital cash value once paid by a customer can circulate fromhand to hand without flowing back to the issuer. In this case, the digital cash provides almost thesame function as real cash or deposits.
16

Suica, like the Edy system, still employs a closed-loop system. However, Suica and Edy cards

can be charged in exchange for cash. Therefore, there is a strong possibility that Suica can replace
cash as soon as it becomes open-looped.
17

Most of these technologies now have been realized (i.e., at the end of fiscal year 2004).

18

See Senda (1997), p.36.

19

See http://hotwired.goo.ne.jp/news/news/business/story/1594.html.

20

See European Central Bank (1998).

26

References
European Central Bank (1998). Report of Electronic Money．
Senda, J. (1997). Electronic Money’s Influences on Financial System and Bank Management, The
Roles of Postal Savings in a Communication and Information Society, Tokai Postal
Administration Bureau, pp.29-41.
Yamori, N., ＆ Nishigaki, N., (2000). Electronic Money Project in Japan, Working Paper No.175
Center on Japanese Economy and Business, Columbia Business School．
Nihon Keizai Shinbun CD-ROM Versions, 1993~1998.
http://www.edit.ne.jp/~arita/jec/smartjapan,html.
http://www.edy.jp/index.html
http://hotwired.goo.ne.jp/news/news/business/story/1594.html.
http://www.jreast.co.jp/press/2004_2/20041009.pdf
http://www.jreast.co.jp/suica/
http://www.min-iren.gr.jp/search/06press/genki/129/genki129-1.html

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