Whither the world’s largest financial institution?
Few observers have followed the twists and turns in Japan’s post office privatisation saga as closely as European banks.
In 2003, when the then- prime minister, Junichiro Koizumi, announced plans to split up the post office – effectively the world’s biggest bank with €2.62 trillion in personal savings and life insurance policies – foreign financial institutions spied an opportunity to compete for the affections of millions of potential investors.
The fate of the Japan Post Group, as it has been known since the privatisation process began in 2007, has been mired in controversy and uncertainty ever since.
Under Koizumi’s reform, the post office was broken up into a holding company with four subsidiaries – a savings bank, post office management firm, insurance company and mail courier – with all of their shares to be sold off over the following decade.
But last year’s transfer of power from Koizumi’s Liberal Democratic Party to the Democratic Party of Japan (DPJ) prefaced a shift away from privatisation, to the frustration of foreign competitors and private domestic banks that thought they had seen the back of the state monopoly.
Earlier this year the DPJ introduced legislation that allowed the government to keep at least a one-third share in Japan Post. The bill which was approved by the lower house in May, but has yet to pass the upper house, contains other proposals that disturb potential newcomers to the insurance, banking and mail delivery sectors.
Japan Post would be able to expand its business portfolio, but would be exempt from the stringent auditing and reporting requirements imposed on private financial institutions.
In addition, the ceiling on individual customer’s savings would be doubled to ¥20m, enabling the body to increase its vast assets – a move that could lead to a haemorrhaging of savings from private banks and dampen lending to small businesses.
Japanese private banks, meanwhile, are dismayed at the prospect of losing business to Japan Post which, as a state-protected entity, can lure new customers with a built-in guarantee for their investments.
But there are clear political advantages to keeping the post office under state control: it is, for instance, a generous buyer of Japanese government bonds and, by extension, a source of funding for the administration’s ambitious welfare spending plans.
That does nothing to add credence to recent DPJ vows to impose fiscal discipline and reduce Japan’s public debt, says Martin Schulz, senior economist at Fujitsu Research Institute.
“Japan needs a piggy bank and a reliable customer for Japanese government bonds,” Schulz says. “Japan Post fits that role perfectly.”
The future will be dominated by the post office and Japan’s megabanks, with smaller entities picking over what little liquidity is left, he adds. “The process towards privatisation has cooled considerably, because the government has its hands full with other problems.”
European banks in Tokyo share concerns that the concentration of so many household assets in so few hands will impede attempts to build a vibrant, pluralistic capital market to rival those in other Asian economies.
Patrick Gillot, chief executive officer for Japan at Standard Chartered Bank, said he was unsure about what kind of Japan Post would emerge from current attempts to continue the reforms started by Junichiro Koizumi.
“That has a downside for foreign banks,” says Gillot, a member of the EBC’s Banking Committee in Tokyo. “We were hoping that privatisation would lead to multiple allocations of liquidity to create a thriving capital market. But now it seems that we are back to an administered economy.”
Concern that Japan Post is about to be given a free hand to add to its already massive pool of assets prompted accusations of unfair practices and threats of legal action from American and European representatives at the World Trade Organisation.
But the government appears to have been swayed by political considerations closer to home.
The country’s 24,500 post offices are a focal point of many communities, particularly those in rural areas. Not surprisingly, the government is reluctant to alienate Japan Post’s loyal customers or take on its over 400,000 employees.
Ministers insisted that the postal reform bill would go through after the recent upper house elections.
But Yasuhide Yajima, senior economist at the NLI Research Institute in Tokyo, believes the DPJ bill is effectively dead in the water and that the future of Japan Post is at the mercy of the voters.
Speaking just before the election took place, Yajima said only a big win for the DPJ would weaken the influence of the People’s New Party [the DPJ’s anti-privatisation coalition partner in the chamber] and, possibly, allow privatisation to reappear on the agenda. “But the popular mood favours keeping it as a nationalised entity,” he said.
“People like the safety and security the post office gives them, and the government has a willing customer for bonds, however bad that might be for the economy in the long run. It is difficult to overstate just how much the Japanese love their post office just as it is,” says Yajima.
But applying the brakes to privatisation represents a missed opportunity, not least for private Japanese banks, says Gillot.
“Foreign banks don’t have the wherewithal to compete with a network that size,” he says. “The real discontent about raising the ceiling on customer deposits is coming from Japanese banks. All we want is an opening up of capital markets so we can help turn Tokyo into a truly international financial centre.”
Foreign firms needn’t lose faith altogether, however, says Schulz; opportunities exist, provided they appeal to Japanese households.
“By pushing Japan as part of their overall strategy in Asia – which has not been as affected by the recession as have the US and Europe, and where there is still an appetite for deregulation – foreign banks would be able to appeal to investors sitting on a lot of idle money.”