Is the Japan Web3 market really opening up?
Q1 2024 Japan Market Update
TL;DR
Japan's Web3 market has been recognized for its growth potential due to the government's deregulatory policies, but faces challenges such as high tax burden on individual investors, a domestic-driven market, and a shortage of talent.
In the first quarter of 2024, Japan experienced political uncertainty due to the ruling party's defeat in the House of Representatives elections and the end of negative interest rates. However, the private sector has been active.
In order for Japan's Web3 market to take off in the future, deregulation, policy consistency, and openness to foster startups through tax incentives will be necessary.
1. How is the Japanese Web3 market doing?
Since the Japanese government's Web3 deregulation policy in 2023, the Japanese Web3 market has attracted significant interest from global projects. Previously, Japan had taken a conservative stance on the Web3 industry following the Mount Gox hacking incident in 2014. However, in 2023, the government identified Web3 as a key national issue with the slogan "JAPAN IS BACK, AGAIN" and began implementing policies to revitalize the market.
Expectations for the growth of Japan's Web3 market are driven by two main factors. First, Japan's excellent content IP and technology can synergize effectively with Web3 innovations. Second, the market is just beginning to blossom, presenting numerous new opportunities for growth and development.
However, there are several challenges to the growth of the Japanese Web3 market. These include a lack of market liquidity due to high taxes on individual investors, a localized business environment focused on the domestic market, and a shortage of IT talent. However, in recent years, the global capabilities of Japanese Web3 founders have been strengthened and companies have been actively investing in the industry with tangible results. It will be interesting to see if the combined efforts of the government and the private sector can help Japan become a leading country in the global Web3 market.
In this report, we examine the key trends and news in Japan's rapidly evolving Web3 market during Q1, analyzing the market's growth potential and challenges.
2. Key changes in Japan from Q1 2024
2.1. Political changes: House of Representatives by-elections lost
The Japanese government's deregulation of Web3 was spearheaded by the Liberal Democratic Party (LDP)'s Kishida cabinet. However, as discussed in "Stance of Asian Political Parties on the Crypto Market," the Kishida cabinet's declining approval ratings have raised the possibility of a replacement, leading to ongoing anxiety that the current policy stance may not continue.
On April 28, Japan's House of Representatives by-elections resulted in victories for the main opposition Constitutional Democratic Party candidates in all three districts. This has created a sense of crisis in the Kishida cabinet, with Prime Minister Kishida's approval rating falling to the low 20s, making his continuation in office uncertain. As a result, there are concerns that the government's policies to develop the Web3 industry may lose momentum.
However, it should be noted that the Constitutional Democratic Party gained three additional seats in the 465-seat House of Representatives in the recent by-election, bringing its total to 21% (99 seats), still short of the LDP, which holds the majority of seats. Additionally, the Constitutional Democratic Party's party approval rating of 6% is less than a quarter of the LDP's 26%, making it difficult for the party to regain power. Despite these facts, it is worth noting that Kishida's cabinet is in a deteriorating situation and is approaching Aoki's Law, a political convention that states that if the combined approval ratings of the government and ruling party fall below 50%, the government will collapse.
2.2. Economic changes: End of negative interest rates
On March 19, the Bank of Japan decided to end its nine-year negative interest rate policy and raise its short-term policy rate to a range between 0 ~ 0.1%. This is the first interest rate hike in 17 years and will have a significant impact not only on the Japanese economy but also on the Web3 market.
The rate hike could make safe-haven assets more attractive to investors than riskier cryptocurrencies. Trading on local exchanges is likely to become even less attractive as high taxes remain unresolved. For projects, rising interest rates will also increase the cost of financing, posing a significant burden. Although VC firms are authorized to invest directly in Web3 projects, the increasing value of cash in the current situation is expected to make them more cautious in doing so.
In addition, the ongoing devaluation of the yen and the decline in consumer sentiment have led the market to expect another interest rate hike in July, and this change is expected to accelerate. However, many factors are at play, including the recovery of the real-world economy, so focusing on a single rate hike is unnecessary.
2.3. Daiwa Securities Group: Equity Investment in Singapore Crypto Startup
On March 6, Japan's Daiwa Securities Group, one of the country's major securities firms, announced a partnership and equity investment plan with Singapore-based cryptocurrency startup Penguin Securities. Daiwa Securities has reportedly invested more than 1 billion yen (approximately $6.4 million) in Penguin Securities, securing a stake of more than 10%.
The two companies plan to explore business opportunities in the burgeoning cryptocurrency market. Through its local subsidiary in Singapore, Daiwa Securities is considering offering Penguin Securities' related products and services to target young, affluent individuals interested in cryptocurrencies. Penguin Securities, a startup founded in 2023, plans to launch crypto derivatives in 2024 and expand into exchanges and brokerage in the future.
Meanwhile, Daiwa Securities' competitor Nomura launched its Bitcoin Adoption Fund, a Bitcoin fund for institutional investors, through its subsidiary Laser Digital in 2023. In comparison, Daiwa Securities' focus on the Singapore market makes its strategy particularly interesting.
Daiwa Securities has also been active in strengthening its crypto business. In 2018, it began offering crypto-backed loans in Japan through its subsidiary PinterestTech. In 2022, it surpassed 33.8 billion yen in cumulative issuance of real estate security tokens (STOs). The partnership with Penguin Securities is part of Daiwa Securities' ongoing strategy to expand its crypto business.
By collaborating with Penguin Securities and strengthening its own capabilities, Daiwa Securities is expected to increase its presence in the domestic and international crypto markets. It will be interesting to see how Daiwa Securities will perform in the face of competition from Nomura.
2.4. Hokkoku Bank: Japan's first deposit-backed stablecoin "Tochika" launched시
In April 2024, Hokkoku Bank, a regional bank in Ishikawa Prefecture, Japan, issued Tochika, a deposit-backed stablecoin. This groundbreaking move follows recent regulatory changes in Japan that allow for the issuance of stablecoins.
The origins of Tochika can be traced back to the Tochituka app that Hokkoku Bank launched last year in partnership with Suzu City. This app allowed residents to earn "Tochipo" points and redeem them at local merchants. Tochika has now evolved into a fully digital currency backed by bank deposits.
While Japan strongly prefers cash, Hokkoku Bank is responding to the demand for electronic payments by attracting merchants through the Tochitsuka app with an attractive 0.5% interchange rate. This strategy is aimed at attracting retailers who were previously dissuaded by high costs.
Although many banks around the world have entered the stablecoin business, Hokkoku Bank's approach is unique in that it is retail customer-centric and backed by actual bank deposits. This distinctive feature, which differs from the traditional reserve method, has attracted attention as a pioneering model for the industry.
In addition, various other Japanese stablecoin projects are emerging, such as MUFG's Progmat Coin and a consortium of financial institutions' DCJPY. If local currency experiments that focus on real-life applications, like Hokkoku Bank's Tochika, are successful, it is expected that banking digital assets will spread to the retail sector.
2.5. SBI Digital Asset Holdings announces JV with Chiliz
SBI Digital Asset Holdings (SBI DAH) has partnered with Chiliz to enter the Japanese sports fan token market. According to a May 9 announcement, the two companies will form a joint venture in Japan to launch a platform that will allow Japanese fans to buy and sell fan tokens of famous overseas soccer clubs such as Arsenal and AC Milan.
Chiliz already sells more than 70 sports fan tokens through its own platform, Socios.com. Building on this, the new joint venture aims to allow Japanese fans to directly engage with the global fan community. This includes participating in the decision-making process of sports organizations and receiving exclusive rewards based on fan tokens.
Japan has a strong baseball and sports card-collecting culture, but its successful digital adoption still needs to be determined. Whether the market will stabilize and fully embrace digital fan tokens remains to be seen.
3. Conclusion
Japan's Web3 market in Q1 2024 was characterized by significant private sector activity amidst political and economic uncertainty. Daiwa Securities, Hokkoku Bank, SBI Digital Asset Holdings, and others announced a series of new Web3-related projects to explore new opportunities. However, there is still a lack of innovative news beyond the projects led by large companies. More startups must participate to improve the dynamism and growth potential of the market. At its current stage, it is undeniable that the Japanese market is still dominated by large companies.
There are many limitations to the blossoming Japanese Web3 market. High tax burdens on individual investors, a closed environment centered on domestic demand, and a shortage of Web3 specialists are among the challenges that need to be addressed. Additionally, there are concerns that recent political uncertainty could jeopardize the deregulatory trend and policy consistency. Hopefully, these obstacles will be resolved in Q2, allowing the Japanese market to accelerate its growth.
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