The rapid proliferation of generative AI has significantly increased the global demand for data centers, which are essential for processing and storing vast amounts of data. In Japan, it is predicted that electricity consumption could increase by nearly 40% by 2050, with a maximum forecasted increase of 37%. This surge is primarily attributed to the power demands of data centers driven by generative AI. The Japanese government is actively promoting the construction of data centers within the country, with significant investments from major companies such as Microsoft. However, this increase in power demand could potentially impact Japan's goal of achieving net-zero greenhouse gas emissions by 2050. The government is planning to revise its future energy policies, focusing on the expansion of renewable energy and the reactivation of nuclear power. The consideration of various scenarios, including technological advancements, is deemed crucial for ensuring a stable future power supply and addressing the numerous challenges ahead.

 

 

 

The Bank of Japan decided at its monetary policy meeting on the 19th to end its negative interest rate policy and raise the policy interest rate to approximately 0 to 0.1%. In addition, it decided to end the purchase of risk assets such as Yield Curve Control (YCC) and Exchange-Traded Funds (ETFs), marking a significant turning point in its large-scale easing policy. This decision was made as it was judged that the prospect of sustainably and stably achieving the 2% price target had been established, resulting in the first interest rate hike in 17 years. A continuation of an accommodative financial environment is expected even after the termination of the negative interest rate policy.

 

The Bank of Japan introduced the negative interest rate policy in February 2016, applying a negative interest rate of -0.1% to a portion of financial institutions' deposits at the BOJ. However, under the new financial framework, the target for policy interest rates has been changed. Additionally, YCC was abolished, and the policy of continuing to purchase long-term government bonds at the current rate of about 6 trillion yen per month will continue, but adjustments will be made flexibly depending on market conditions.

 

The termination of new purchases of ETFs and Real Estate Investment Trusts (REITs) also reflects changes in these policies, resulting from the BOJ's review of easing measures to achieve a sustainable and stable 2% price target. Currently, the year-over-year increase rate of the consumer price index exceeds 2%, and the factors driving price increases have shifted from transient ones to those reflecting labor costs. Against this backdrop, the BOJ judged that the 2% price target could be achieved sustainably and stably, concluding that the current framework of financial policy, including the termination of negative interest rates, has fulfilled its role.

 

 

 

The Cabinet Office announced the revised Gross Domestic Product (GDP) figures for the period from October to December 2023, showing a real seasonally adjusted increase of 0.1% from the previous quarter and a 0.4% increase on an annualized basis, marking an upward revision from the preliminary figures and resulting in positive growth. This positive growth, the first in two quarters, was primarily driven by a significant rise in corporate capital investment. In particular, excluding finance and insurance, capital investment increased by 10.4% from the previous quarter after seasonal adjustment, with enhancements in production systems related to automobiles and semiconductors and software investments in non-manufacturing sectors supporting growth.

 

On the other hand, personal consumption decreased by 0.3% from the previous quarter, continuing to show negative growth. The decline in air conditioners and processed seafood products, along with poor performance in winter clothing and sluggish growth in dining out, impacted consumption. The contribution of private inventories was revised downward, indicating a larger-than-expected reduction in inventories, including in transportation machinery such as railways and aircraft, ships, and production machinery. Residential investment and public investment also continued to decline.

 

Exports and imports remained stable, with exports increasing by 2.6% and imports by 1.7% from the previous quarter, supporting economic growth through external demand. The nominal growth rate was also revised upwards from the preliminary figures, with a 0.5% increase from the previous quarter and a 2.1% annualized increase. The calendar year growth rate for 2023 showed a real increase of 1.9% and a nominal increase of 5.7% from the previous year, indicating a robust expansion of the overall economy. While the growth in capital investment is leading the economic growth, the weakness in personal consumption continues to be a challenge.

 

 

 

The Japanese government has revised the tax rules in the 2024 fiscal year tax reform outline for blockchain companies and investors holding cryptocurrencies and tokens. Previously, corporate tax was imposed based on the market value at the end of the fiscal year for these holdings, but the revision excludes them from market value assessment if they are not held for short-term trading purposes. This revision is in response to the outflow of Japanese blockchain companies and investors to overseas, aiming to promote collaboration with Web3 companies and market formation in Japan. However, it remains uncertain whether the outflow of Web3 companies to foreign countries will completely stop, and Japan faces competition from other countries like Dubai and Singapore in attracting these companies. 

 

 

 

On October 20th, Prime Minister Fumio Kishida indicated a policy to instruct ruling party leaders to consider a temporary income tax reduction to return the increased tax revenue to the people. The Prime Minister stated, "We want to concretize the return to the people as soon as possible," and plans to meet with Koichi Hagiuda of the Liberal Democratic Party and Yosuke Takagi of the Komeito Party, both chairpersons of political research committees. The strategy to return a portion of the increased tax revenue to the citizens is positioned as a "temporary and limited measure," and is expected to be announced in the policy speech on the 23rd.

Furthermore, a concrete policy is expected to be established within the ruling parties' tax reform outline for the fiscal year 2024. The government and ruling parties are adjusting towards including extensions of benefits for low-income earners and gasoline subsidies in response to rising prices, and are also considering income tax cuts that would benefit the middle class.

The tax revenue for the fiscal year 2022 increased by 6 trillion yen from the previous year to 71.1 trillion yen, and the Prime Minister has made it clear that the increased tax revenue should be appropriately returned to the citizens. The government believes that measures are necessary to fully escape from deflation, and economic measures are expected to focus on countermeasures for high prices and strengthening supply capacity.

 

 

 

 

The Ministry of Justice has announced the commencement of research on a new system that allows for the creation and storage of wills online using digital technology. In October, an initial meeting of experts regarding the introduction of this new system is scheduled. The objective is to establish a system that enables the easy creation and storage of legally valid wills using the internet, facilitating smooth inheritance in a digital society.

 

Currently, there are three types of wills with legal validity: handwritten wills, notarized wills, and sealed wills. In the new proposal, considerations are being made to allow individuals to easily draft their handwritten wills on computers or smartphones and store them on the cloud. With digitalization, even those without specialized knowledge can effortlessly create wills. Moreover, by utilizing blockchain technology, the risk of tampering can be reduced.

 

Looking at international examples, in 2019, the US enacted the Electronic Wills Act, which acknowledges digital wills if they have an electronic signature. On the other hand, countries like Germany and France still do not recognize digital or recorded wills. Wills are critical documents used to confirm an individual's intent after their death, so discussions around digitalization are approached with caution.

 

The Japanese government plans to proceed with deliberations to ensure the safety and effectiveness of the new system, taking into account these international examples and opinions.

 

 

 

The Mitsubishi UFJ Financial Group (MUFG) and Mizuho FG are collaborating on a digital currency for inter-company settlements. By 2024, the digital currency is expected to be issued through the common infrastructure of MUFG's Mitsubishi UFJ Trust Bank, with Mizuho also participating in this framework. This digital currency can complete settlements instantly and at nearly zero cost, bringing efficiency to complex and costly trade settlements.

 

Mitsubishi UFJ Trust is planning to establish a new company called "Progma," which will be responsible for the issuance infrastructure of digital currencies and digital securities. This project will be funded by entities such as the Big Three banking groups, JPX Research, and NTT Data. Mizuho Bank will also join Progma's framework and explore potential areas for digital currency application. Meanwhile, Sumitomo Mitsui FG is considering the use of digital securities backed by tangible assets like real estate.

 

The digital currency being considered for issuance by these banks is known as "stablecoin." By Japanese regulations amended in the Fund Settlement Law, the issuance of these stablecoins is limited to specific financial institutions and requires backing by an equivalent amount of legal tender.

 

The main features of stablecoins on the blockchain are their fast settlement speeds and the ability to incorporate transaction information. This enables simultaneous product delivery and payment. Particularly for complex trade settlements, which can be time-consuming and costly, this digital currency is expected to bring significant efficiencies.

 

Currently, many international remittances are settled via the Swift system, which often takes more than two business days. Additionally, the commission fee can be as high as 10%, increasing the cost of trade. With the new digital currency, these costs and time delays are expected to be reduced. Banks plan to generate revenue by managing the legal currency held as collateral for stablecoins, and the specifics of service fees will be discussed in the future.

 

 

For the fiscal year 2024 budget proposal, the Japanese government has unveiled plans to allocate over 2 trillion yen towards the Green Transformation (GX) initiative aimed at decarbonization. Of this, 1.2 trillion yen is slated for the 2024 budget, with the remainder to be spent over the next 3 to 5 years. Key areas of focus include support for domestic production of batteries, semiconductors, and hydrogen-related equipment, as well as investments in EVs and renewable energy devices, research and development for next-generation nuclear reactors, nurturing of startups in the decarbonization sector, and promotion of EVs and FCVs. Furthermore, efforts are being considered for decarbonizing production processes and supporting sustainable aviation fuel. Globally, the U.S. and the EU are also pushing forward with massive decarbonization investments. Japan is following suit, aiming for an investment of over 150 trillion yen over the next decade. The government also plans to issue GX economic transition bonds, targeting an expenditure of 20 trillion yen. Against the backdrop of the novel coronavirus and international political tensions, Japan is signaling a policy that emphasizes domestic production and collaboration with the U.S. and Europe.

 

 

The Japan Virtual Currency Exchange Association (JVCEA) and the Japan Cryptocurrency Business Association (JCBA), which are self-regulatory organizations for cryptocurrency in Japan, announced that they have submitted a request for tax reform for the fiscal year 2024 to the Financial Services Agency.

 

At the heart of the request is a proposal to change the current comprehensive taxation on cryptocurrencies, which can reach as high as 55%, to a uniform 20% as in the UK and US. The rationale behind this proposal is the expectation that the trading and holding of cryptocurrencies can be liberated from tax burdens, fostering further development.

 

Furthermore, they are advocating for the application of a loss carryover deduction for the next three years. This is a system that allows the losses from investments to be carried over and deducted from income tax in subsequent fiscal years. In addition, they are calling for tax reform regarding derivative trades, demanding an appropriate taxation for not only spot trades but also future and other derivative trades of cryptocurrencies.

 

They also request exclusion from taxation based on market value at the end of the term for cryptocurrencies held by corporations. This is a request to exclude from taxation cryptocurrencies held by corporations for purposes other than short-term trading, at the market value at the end of the term. It aims to remove obstacles when venture capitals hold cryptocurrencies issued by companies or when companies engaged in Non-Fungible Token (NFT) businesses hold cryptocurrencies for payment purposes.

 

Furthermore, they are requesting that tax be deferred at the time of exchange between cryptocurrencies. In other words, they suggest considering not taxing at the point of exchanging one cryptocurrency for another, and taxing collectively when that is exchanged for fiat currency. However, as there are various points of discussion on this matter, including whether or not to include stablecoins, it has been submitted as a future request.

 

All these proposals are perceived as necessary tax reforms to enhance the competitiveness of the domestic cryptocurrency industry, as the government positions Web3, the next-generation Internet, as a growth strategy.