KDDI is launching a new service in September that will allow subscribers to use their phones to buy goods, reserve tickets and conduct other commercial transactions, in a bid to remain competitive in Japan's increasingly difficult mobile phone market.

Japan's second largest mobile phone carrier on Monday unveiled two new handsets embedded with a small chip developed by Sony, known as FeliCa, which turns the mobile phone into a “mobile wallet”.

From next January, users will also be able to use the phones as commuter train passes for one of Japan's largest public railway systems, which is operated by JR East.

KDDI's decision to offer the new services highlights the increasingly fierce competition among mobile phone operators in Japan keen to hold on to existing subscribers.

KDDI is following in the footsteps of NTT DoCoMo, Japan's largest mobile phone operator, which launched its own mobile phones with electronic money functions last year.

Vodafone is also expected to launch a similar service in the autumn, although unlike KDDI and DoCoMo, it is not clear whether it will have handsets ready for the JR East service in January, which is expected to be the main driver of demand for the mobile wallet.

DoCoMo and KDDI admit the new services will not add directly to revenues since using the phone to pay for goods and services does not increase customers' network usage. Rather, the IC chip inside the phone turns it into a pre-paid card that can be repeatedly recharged.

However, the use of mobile phones to pay for goods and services, particularly public transportation “will become part of Japan's social infrastructure”, said Tadashi Onodera, KDDI president. “So, we believe it is crucial to offer this service.”

Japan's three main carriers, which dominate its mobile phone market, are preparing for a bruising battle when number portability is introduced next year.

This will make it easier for subscribers to move from one carrier to another.

Japan's established carriers also face increased competition in just a few years after the regulator decided to award new mobile phone licences. Softbank, the broadband services group, has already announced plans to enter the market and is expected to raise the heat with substantially discounted services.