Heading South – The New Strategy of Japanese Fintech Institutions?

Under the pressure of both the flagging Japanese domestic economic market and the turbulent global cryptocurrency market, we are seeing a shift of institutions in the Japanese fintech industry – Southeast Asia may become their “second home”.

This week, U.S.-based cryptocurrency exchange Kraken announced it will end its operations in Japan next month, after cutting 30% of its workforce due to the country’s current weak market conditions and a huge shakeup in the global cryptocurrency market, it said. Although Kraken is not itself a Japanese firm, its leaving the market is a clear indication of the industry’s weakness.

Just the day before, Jakarta-based fintech company Akulaku raised US$200 million from Japan’s largest bank, Mitsubishi UFJ Financial Group (MUFG), as part of a strategic investment that will lead to the startup and MUFG’s planned joint expansion of Southeast Asian markets and products by 2023.

Both institutions are facing the same weakening state of the Japanese economic market and the huge ongoing turmoil in the global crypto industry.

As reported by Bloomberg, the Bank of Japan will implement what was an unforeseen move to double the yield ceiling, as stated in the summary of opinions from Wednesday’s December meeting. This move quickly contributed to the weakening of the yen. The widening of the yield range follows investor concerns about the Japanese bond market. Sentiment fell to a record low in a Bank of Japan survey earlier this month. The BOJ’s 10-year bonds also did not trade for four straight days during the October and December sessions, suggesting that liquidity in the market has been drained.

Meanwhile, 2022 has been marked as the start of a new “crypto winter.” A number of the most influential players are facing total collapse, while the prices of digital currencies are also in freefall. Bitcoin, the leading cryptocurrency by market capitalization, has lost 60% of its value this year, while the overall cryptocurrency market has shrunk by a total of about $1.4 trillion with the collapse of FTX, Celsius, Luna and others.
However, in the meantime, the Southeast Asian market does not seem to have been swept up in the storm.

According to an analysis by Bobby Pham, CMO of KardiaChain published on Nasdaq, ASEAN has many more advantages than the West in terms of crypto market potential. These countries have a high proportion of young people, who are more likely to adopt new ideas and are more fond of emerging technologies. Based on data from STATISTA, in 2020 40% – 50% of Southeast Asia’s population fell into the 20-54 age range. ASEAN countries’ regulators are also showing a more friendly attitude toward blockchain startups. For example, there are reportedly over 230 blockchains or distributed ledger tech (DLT) focused organizations operating in Singapore. Plus,the analysis mentioned that Southeast Asia hosts 8.58% of the world’s population but accounts for 14% of global cryptocurrency transactions, which demonstrates an incomparably high-potential region for crypto innovation.

Kenichi Yamato, the managing executive officer and chief executive of MUFG Bank’s Global Commercial Banking Business Unit, mentioned the importance of the Southeast Asia market in a recent statement: “Southeast Asia is key and a second market to MUFG. Our investment in Akulaku will further solidify our commitment in this region to meet the growing financial needs of underserved customers.”

These two announcements within recent days demonstrate the Japanese fintech industry is looking overseas, and particularly at Southeast Asian markets, where the economic environment is relatively stable, and regulations and digital currency infrastructure are still malleable.

However, there are undoubtedly still risks and challenges for Japanese financial institutions to enter the Southeast Asian market.

Take Indonesia as an example. Though tensions in the currency have moderated since last month, Warjiyo, Governor of Bank Indonesia, said that uncertainty would stay high through 2023 and this could limit capital inflows to emerging markets.

How to cope with the uncertainty of emerging markets will be the key to the success of this wave of Japan’s fintech industry shifting focus.

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