Japan Post’s murky privatization

Market expectations are running high for the imminent listing of the Japan Post group companies on the Tokyo Stock Exchange, which marks the beginning of the final phase of postal privatization started in 2005. But despite the hype over the initial public offering of Japan Post Holdings Co. and its two financial units, the long-term business prospects for the former state-run postal services are far from clear, due partly to the political twists in the privatization scheme.

Currently, the government wholly owns all shares of Japan Post Holdings, which in turn holds 100 percent of Japan Post Bank Co., Japan Post Insurance Co. and Japan Post Co. On Nov. 4, 11 percent of the shares in the holding company, Japan Post Bank and Japan Post Insurance will go on sale. The government plans to sell the shares in Japan Post Holdings in several batches until its stake falls to around a third of the total, while Japan Post Holdings will sell its shares in the two financial units and reduce its ownership to about 50 percent. Japan Post, the mail and parcel delivery service, will not go public. The shares in Japan Post Holdings, Japan Post Bank and Japan Post Insurance will be offered at ¥1,400, ¥1,450 and ¥2,200 per share, respectively. The total market capitalization of the three firms will reach ¥13.56 trillion, the biggest since NTT Corp.’s ¥24.96 trillion at its debut price when it went public in 1987.

The Japan Post group boasts a network of 24,000 post offices nationwide, with the combined assets of the group firms reaching ¥300 trillion. Japan Post Bank, operator of the former yucho postal savings system, is the nation’s largest financial institution, with outstanding deposits of ¥177 trillion at the end of March topping those of any of the mega-banks.

Despite the gigantic size of its operations, however, doubts linger over the profitability and future business prospects of Japan Post group firms. Now that they are going public, the government and the group firms need to come up with medium- to longer-term plans, including a road map for full privatization of the group.

The scheme to privatize postal services began in 2005, when the administration of Prime Minister Junichiro Koizumi passed relevant laws through the Diet. Koizumi’s initial scheme dictated that Japan Post Holdings will sell off all of its shares in the two financial units by the end of September 2017. However, an amendment to the postal privatization law, enacted under the Democratic Party of Japan-led government that included privatization foes as a coalition partner, lifted the deadline to say only that the shares in the financial units should be disposed of “as early as possible.”

The murky path toward full privatization keeps the business operations of the group firms in fetters. As long as the government keeps control via its stake in Japan Post Holdings, the two financial units will be deemed effectively government-backed, and because of this advantage over other financial institutions in terms of their creditworthiness, tight restrictions on the scope of their business dating back to their days as state-run operations remain.

The Japan Post Bank behemoth, for example, suffers from low profitability of its operations, and remains unable to start offering new services such as housing loans and lending to corporate customers. Recent calls by Liberal Democratic Party lawmakers to raise the upper limit on deposits for each Japan Post Bank account have met with strong objections from private-sector financial institutions on the grounds that the bank, in which the government will continue to indirectly hold a substantial stake, does not stand on an equal competitive footing.

Even if the financial units are to be fully privatized in the future, lack of experience in a variety of financial services cloud their prospects for survival in a competitive environment. Japan Post Bank today invests much of its funds in government bonds, and whether it has the manpower and know-how to diversify into more risky but higher-return investments remains unclear.

The postal operator Japan Post will remain under the group’s umbrella even after the financial units are fully privatized. But its postal services struggle to make a profit, and the firm manages to be in the black thanks largely to nearly ¥1 trillion in annual revenue from the two financial units, which pay the commission fees for running the counter services for the banking and insurance operations at post offices.

The government expects to use roughly ¥4 trillion from the sale of Japan Post Holdings shares to finance reconstruction of areas devastated by the 2011 Great East Japan Earthquake. To maintain and increase the value of the Japan Post group firms after the listing, it is all the more imperative for the government and the holding company to take steps that improve the future prospects of the group firms, including clarification of the path toward full privatization of the financial units.