The second largest economy in the world is sprinting toward a cash-free society, writes David McNeill.

For observers of portentous technological omens, there was a striking statistic buried in a summer report on the economy by Japan's Central Bank. The number of coins in circulation fell by a quarter per cent - the largest year-on-year decline since 1971. That trend, which began in July 2005, accelerated so quickly this year that many analysts began searching for causes.

One culprit is Eri Sugimoto. Like about 20 million other Japanese, she never leaves home without her Suica card, a slim train pass that gets her through any ticket barrier in the Tokyo area network. Instead of fumbling for coins at a ticket machine, she swaps money for electronic credit and swipes the IC-equipped smart card over an infra-red reader to open the barriers.

If she wants breakfast while she waits for her train, she can use the card to pay for that too. Thousands of station restaurants, coffee shops and newsstands have installed Suica readers beside their cash registers.

The machines make a "kerching" sound as the card is swiped, automatically deducting the cost of the purchase. "I just stock up on credit once a month and I'm good to go," said the 23-year-old sales clerk. "I find myself carrying less and less cash."

According to the Nikkei newspaper, 57 million people, or nearly half Japan's population, now use electronic money regularly. By December, the daily business broadsheet estimates that a total of 689 billion yen (€4.2 billion) in e-cash will have been spent by consumers, a nearly four-fold rise from the previous year.

The e-money economy has soared this year on the back of several far-reaching developments.

In March, 100 private transport companies in the Tokyo region issued the Pasmo card, another electronic ticketing system that is compatible with Suica. A single smart card will now get you a ride on buses and trains anywhere in the world's largest metropolis, and for good measure it can be used to shop at 12,000 stores.

The following month, the parent company of Seven-Eleven became Japan's first retailer to issue e-money when it rolled out the Nanaco, a pre-paid system for use in Japan's huge convenience store market. Consumers can now load e-credit onto swipe cards or mobile phones and spend it at 11,750 Seven-Eleven stores, and thousands more affiliated outlets. Over 30 million Nanaco transactions have since been recorded per month, making it Japan's most popular e-money card.

Mobile phones may do more than anything else to silence the jingle of coins. Almost everyone has one and they are easily converted into what Japan calls "osaifu-keitai," or wallet-phones; basically handsets loaded with contact-less IC cards. The country's largest mobile-phone carrier NTT DoCoMo forged a major partnership last year with transport giant East Japan Railway, operator of Suica. NTT is particularly excited by the prospect of its handsets morphing into virtual wallets. The company's website trumpets the benefits: "Mobile phones can be utilised as electronic money, credit card, electronic ticket, membership card, airline ticket, and more," it says. That's no idle boast: passengers on All Nippon Airways can already book and claim their boarding tickets by swiping their phones over a reader at the airport.

The consumer attractions are obvious: payment takes seconds and helps shorten Japan's long shopping queues. Mobile phone screens give an instant readout on credit balance and purchase history, and they are smaller than most other electronic devices. Buying credit is straightforward although some people opt to be billed at the end of every month.

One indication that the e-money boom is reaching critical mass is a recent decision by McDonalds Japan to install e-wallet readers in its restaurants. Add burgers and fries to vending-machine drinks, movie tickets and thousands of other products that can now be bought with a handset. Some religious shrines have even started to accept e-money payments. Over 25 million people have already signed up for mobile phones that can substitute for cash, and by next year, most estimates predict that over 40 per cent of Japan's handsets will be e-money compatible.

It is no surprise perhaps that Japan, which has always taken technology in its stride, is embracing the cash-less economy, but other unique factors are also in play. Thrifty Japanese consumers prefer pre-paid purchasing to credit cards, which are used here in only about 10 per cent of transactions compared to about 25 per cent in the US. And the dominance of heavy-hitters like NTT and Japan Rail has helped create several large industry standards that less-consolidated markets cannot match.

Tech analysts are now struggling to keep pace with a phenomenon that seems to be growing organically. One of Japan's largest electronics' retailers, Bic Camera, for example, has started allowing points on its customer loyalty cards to be exchanged for Suica credit, one of a growing number of company-to-company exchanges of e-cash. Some firms also allow consumers to exchange up to 50,000 yen (€303) in credit between mobile phones, creating headaches for financial regulators.

A lingering barrier to this brave new cashless society, however, is competing formats. One of the first e-cash services, Edy, backed by Sony, is linked to about 49,000 retail outlets, including convenience store chain Lawson, putting it directly in competition with Seven-Eleven.

Suica's 12,000 affiliates are incompatible with Edy, but that could be about to change. Sony, JR East and NTT have agreed with several other e-cash providers to a common terminal, which will be rolled out soon.

"The key to the growth in the e-money market is the proliferation of common terminals," said the Nikkei recently.

Once those problems are ironed out, it will be technically feasible to leave the house every morning in Japan carrying nothing but a mobile phone.

E-money: the key players

There are at least four major e-money systems in Japan based on the same technology, the FeliCa IC-card platform, developed by Sony.

Suica and Edy are pre-paid, while others such as QuicPay are linked to credit card companies.

After starting on smart cards, the services are increasingly shifting to mobile phones, which can be stocked with credit by placing them against a charging station or via encrypted websites.

SUICA/PASMO

A pre-paid system started by transport giant East Japan Railway, now used by about 20 million commuters in the greater Tokyo metropolitan area. Credit is loaded onto IC cards, available at train and bus stations, or into mobile phones.

EDY

Another prepaid system with 28 million paid-up members and linked to 40,000 outlets across the country. Started in 2001 by BitWallet, which is backed by Sony, NTT DoCoMo and All Nippon Airways, Edy is now available on over three million mobile phones.

NANACO

(Seven & i Holdings) Launched in April this year, used in 11,750 Seven-Eleven convenience stores, as well as thousands of other affiliated restaurants and shops. Over 30 million Nanaco transactions have since been recorded per month, making it the country's most popular e-money card.

QUICPAY

Operated by Japanese credit-card company JCB, it allows consumers to use NTT DoCoMo and other cell phones to pay for goods and services, which are then billed to existing credit cards.