Japan has built one of the world’s most conservative stablecoin regimes. But after pioneering a comprehensive legal framework for yen-pegged stablecoins, its bank-dependent structure has been called out for limiting innovation in the decentralized finance sector.
In Asia, Hong Kong, Singapore, and Japan are in the spotlight for rolling out licensing rules for stablecoin operators. While regulators celebrate Japan’s legal clarity, its inward-looking framework could leave the country lagging behind regional peers like Singapore and Hong Kong, warns Professor of Economics Sayuri Shirai at Keio University.
Under Japan’s current framework, Shirai doesn’t see momentum for stablecoins taking off. She explains that Hong Kong’s regulations are much more stringent than Japan’s. But they are also more open to non-banks and international players issuing stablecoins, which is a significant difference.
“Hong Kong and Singapore are open to outsiders as long as they meet regulations. Also from the beginning, they have been thinking about developing tokenized assets and cross-border transactions. But Japan from the beginning is very domestic.”
Stablecoin rules prioritize domestic transactions
Japan’s “pioneer” status stems from the 2023 amendment to the Payment Services Act (PSA), which restricted stablecoin eligibility to banks, trust banks and licensed wire transfer providers. Non-bank stablecoin issuers are required to partner with Japanese banks.
The framework is among the most robust worldwide in terms of user protection. The amendment introduced strict safeguards such as full trust protection of reserves, redemption guarantees and periodic transparency reports.
Associate Professor Tomonori Yuyama at Senshu University’s Faculty of Commerce said the framework reflects Japan’s emphasis on financial stability.
“Stablecoins resemble digital deposits and involve custodial responsibility so it makes sense that only highly-regulated issuers are allowed. Given that stability is paramount and full backing is mandatory, limiting issuance to major financial institutions is a valid measure.”
Yuyama also warns that Japan’s yen-backed stablecoins could disconnect it from global blockchain ecosystems.
“Japan’s yen-based stablecoins circulate within closed systems and can’t connect with global DeFi or Web3 ecosystems, putting Japan’s digital economy at risk of isolation.”
Japan’s regulatory framework has effectively barred major global stablecoins such as Tether and USDC. Since foreign issuers lack domestic licenses, the tokens can’t legally move through Japan’s regulated exchanges or payment networks.
Yuyama said the restriction reflects Japan’s preference for consumer protection even at the cost of limiting access to global digital markets.
“Major global stablecoins such as Tether and USDC are practically unusable in Japan. Ideally, a system enabling their safe use would be desirable. But, since these issuers are foreign, Japanese users might not be legally protected which poses a user-protection issue.”
A lack of strong consumer demand
Japan has embraced new rules to bring stablecoins under official oversight, but few people seem eager to use them. Professor Sayuri Shirai of Keio University explains that consumers already enjoy a variety of digital payment options, from PayPay to Apple Pay, that make cashless life accessible.
In a country where nearly a third of citizens are over 65, Shirai said many consumers are content with existing payment options which leaves little momentum for new digital currencies to take hold.
Stablecoins also lack appreciation potential and are yet to offer a compelling alternative, according to Shirai.
Japan’s stablecoin issuers search for profit
Stablecoin issuers in Japan face a tougher path to profitability compared to their counterparts in the United States.
Associate Professor Tomonori Yuyama at Senshu University said issuers rely mainly on interest income from reserve assets, a model supported by higher U.S. yields but constrained by Japan’s less than 1% interest rates.
While some stablecoin issuers may plan to earn fees from payments or remittance services, Japan’s model requires large transaction volumes. Strict rules mandating full reserve backing and investment in low-risk assets further limit returns, Yuyama said.
Japan’s underdeveloped tokenized-asset market
Shirai emphasizes that Japan must develop its tokenized asset market if it wants stablecoins to gain traction. She argues that, at present, there is almost no functioning market for tokenized assets in Japan unlike the United States.
Japan’s asset tokenization market was valued at 500 million in 2022 but it’s projected to reach 4.1 billion in 2030.
Japan has written the laws for turning property and securities into digital tokens, but the market has yet to follow. Yuyama said Japan’s legal groundwork for asset tokenization is largely complete and some sectors such as real estate tokens are already operating.
What’s missing, he said, is adoption and technical integration. Investors who can already buy bonds or mutual funds online don’t yet feel any added value from tokenization itself. Yuyama said there is also a missing link between yen-backed stablecoins and real-time Delivery Versus Payment (DVP) settlement. It’s an upgrade that could unlock liquidity and scale for Japan’s token markets.
Shirai said without a market where financial instruments like real estate, green bonds, or artwork can be represented on blockchain, there is no reason for consumers to use stablecoins.
“If Japan’s Financial Services Agency wants people to use stablecoins they also have to develop a market for that,” since the two are interdependent.
