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Introduction

In the cryptocurrency market, seclusion and independence are the inherent impressions many people have of Japan. Often, its presence is not strong, making it easy to overlook. In comparison to other markets in the Asian region, Singapore, Hong Kong, and South Korea are more frequently mentioned and focused on.

However, as the world's third-largest economy and a region that established its position in cryptocurrencies early and formulated regulatory frameworks, Japan has unique advantages and market characteristics. With the government strongly embracing cryptocurrencies and driving industry development, new changes and opportunities are gradually emerging.

1. Macroeconomic Indicators and Current Situation

Japan has a strong and well-developed financial system, laying a solid foundation for the country's blockchain and Web3 technology development. When discussing the Japanese cryptocurrency market, regulation becomes a key focus.

The country maintains strict regulatory measures to uphold investor stability, market security, and overall integrity. While these regulations aim to protect the industry, the compliance complexity and high tax burden associated with cryptocurrency-related profits may pose obstacles to the entry and expansion of smaller cryptocurrency enterprises. Additionally, the lengthy token listing approval process may create a perception of reduced market activity.

1.1 Geographic Location and Population Size

Japan is an island nation in East Asia, located in the northwest Pacific Ocean as part of the Ring of Fire. It spans a group of islands consisting of 14,125 islands, with five main islands being Hokkaido, Honshu ("Mainland"), Shikoku, Kyushu, and Okinawa, along with nearly 4,000 smaller islands. Japan is closest to the Russian Siberian region, while South Korea and China are further south. Tokyo is the country's capital and largest city, followed by Yokohama, Osaka, Nagoya, Sapporo, Fukuoka, Kobe, and Kyoto.

According to United Nations data, Japan has a population of nearly 125 million, with nearly 122 million being Japanese nationals (estimated in 2022), accounting for 98.1% of the total population, with the remaining being minority foreign residents, including indigenous Ainu people, Ryukyuans, Koreans, Chinese, Filipinos, Brazilians mostly of Japanese descent, and Peruvians mostly of Japanese descent.

Japan is the fastest-aging country in the world, with the highest proportion of elderly population, comprising one-third of its total population, accompanied by an increase in life expectancy and a decline in birth rates. Japan's total fertility rate is 1.4, below the replacement rate of 2.1, ranking among the lowest in the world; the median age is 48.4 years, the highest globally. The Japanese government projects that by 2060, each working-age person will correspond to one elderly person. Immigration and incentives for childbirth are sometimes suggested as solutions to provide young workers to support the country's aging population.

1.2 Economic Structure and Characteristics

Japan is the world's fourth-largest economy, following the United States, China, and Germany (Germany surpassed Japan to become the third-largest economy in 2023), with its economy primarily composed of the service industry, manufacturing, and import-export business. Japan's economic characteristics reflect its high level of industrialization, strong external dependence, and unique economic structure and organizational forms:

  • The service sector accounts for about 70% of Japan's GDP, renowned for wholesale and retail trade, real estate services, as well as professional, scientific, and technical activities;
  • High level of industrialization, leading in the global electronics and technology fields, with agriculture not playing a major role;
  • Primarily focused on processing trade, importing raw materials and fuel, exporting products to expand international markets, ranking as the world's fifth-largest exporter and fourth-largest importer;
  • Majority of businesses are located in the narrow coastal belts along the Pacific Ocean and Seto Inland Sea, facilitating import of raw materials and export of products;
  • Manufacturers, suppliers, and distributors are closely integrated, forming strong corporate alliances with tight teamwork;
  • Characterized by a seniority-based promotion system and lifetime employment, making it difficult for foreign or new companies to penetrate the Japanese market;

Furthermore, demographic changes significantly impact its economy, with Japan facing issues such as a declining proportion of the labor force, aging population, and decreasing birth rates, leading to a decrease in housing demand, suppressed capital accumulation, reduced investment returns, subsequently affecting economic activities and innovation.

1.3 GDP Ranking Overtaken by Germany

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According to Kyodo News on February 15, 2023, Japan's nominal Gross Domestic Product (GDP) for 2023 was $4.2106 trillion, lower than Germany's $4.4561 trillion, dropping to the fourth position globally. Japan losing its status as the "world's third-largest economic power" is not accidental but rather an inevitable result of its long-term lack of stable growth momentum. In October 2023, the International Monetary Fund (IMF) had previously predicted that Japan's nominal GDP would be surpassed by Germany in 2023, so when this result was officially announced, it did not cause much public outcry or backlash, as Japanese society seemed to accept this outcome calmly.

Japan's long-term lack of stable growth momentum is the underlying reason for Japan's nominal GDP being overtaken by Germany in 2023, making it imperative for the Japanese government to find long-term growth momentum to drive Japan's economic development. If the economy continues to stagnate in the next three to five years, this will become a real issue for Japanese society.

1.4 Inflation Rate Data

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In March 2024, Japan's annual inflation rate decreased from a three-month high of 2.8% in February to 2.7%, aligning with market expectations. Prices slowed down in transportation (2.9% vs. 3.0% in February), clothing (2.0% vs. 2.6%), furniture and household goods (3.2% vs. 5.1%), healthcare (1.5% vs. 1.8%), communication (0.2% vs. 1.4%), and culture and entertainment (7.2% vs. 7.3%). Meanwhile, food (4.8%), housing (0.6%), education (1.3%), and others (1.1%) maintained stable inflation rates. At the same time, the price decline for fuel and light sources was the smallest in the past year (-1.7% vs. -3.0%), with electricity (-1.0% and -2.5%) and natural gas (-7.1% vs. -9.4%) experiencing a slowdown in the rate of decline.

The Bank of Japan ended its negative interest rate policy last month, breaking free from a decade-long super loose monetary policy. The market is looking for clues on when the Bank of Japan will raise interest rates again. The Bank of Japan stated that achieving a benign cycle of stably reaching the 2% price target and strong wage growth is crucial for policy normalization.

Additionally, the Bank of Japan is focusing on whether service prices will rise along with wage growth. This year, Japanese corporate wage increases are the largest in 33 years, but real wages have been declining over the past two years after adjusting for inflation. A Japanese Ministry of Internal Affairs official pointed out on Friday that the recent wage increases have not yet been reflected in service prices.

1.5 Japan's Legal Tender

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The Japanese Yen (Japanese: 円, Romaji: en, English: Yen), with its banknotes known as Japanese Banknotes, is Japan's legal tender and is often used as a reserve currency after the US Dollar and Euro. The Yen was established on May 1, 1871, with four denominations of banknotes in circulation: 1000, 2000, 5000, and 10,000 Yen, and six coin denominations: 1, 5, 10, 50, 100, and 500 Yen.

Interestingly, the issuer of Yen banknotes is the Bank of Japan ("Bank of Japan - Japanese Banknotes"), while the issuer of Yen coins is the Japanese government ("Japan"). Furthermore, Yen coins do not have unlimited legal tender capability, so in principle, the maximum legal use limit for the same denomination coins in a single transaction is 20 coins (i.e., the maximum payment capacity of coins is 1 Yen × 20 coins + 5 Yen × 20 coins + 10 Yen × 20 coins + 50 Yen × 20 coins + 100 Yen × 20 coins + 500 Yen × 20 coins = 13,320 Yen), and merchants have the right to refuse payment beyond this limit.

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Despite the Federal Reserve and other central banks actively raising interest rates in 2022 and 2023 to curb inflation, the Bank of Japan has kept rates at zero and continues to print a significant amount of legal tender. In 2023, Japan's core inflation rate rose by 3.1%, marking the largest increase since 1982.

Inflation weakens the purchasing power of legal tender and prompts investors to allocate funds to alternative assets with attractive value storage properties like Bitcoin and gold. Unless the Bank of Japan accelerates the exit from its planned super loose monetary policy, the US Dollar will continue to appreciate against the Yen, making it more attractive relative to other assets.

2. Current Situation and Characteristics of the Cryptocurrency Market

Japan has been actively nurturing the web3 industry, with the government releasing a web3 white paper, reforming taxation, attracting investments, and announcing a five-year policy for startup development, aiming to increase the number of Japanese startups to 100,000 within five years and invest approximately 100 trillion Yen to create 100 unicorn companies.

2.1 Strong Government Support for Blockchain Development

The ruling party's Web3 project team released a white paper on April 6, 2023, viewing Web3 as a national strategy. For