The House of Councilors’ rejection Monday of the contentious postal privatization bills fueled pessimism in the financial sector about future reforms of the world’s biggest financial institution, banking industry insiders said.

“In the current political arena, there is no one but (Prime Minister Junichiro) Koizumi who can go forward with the reforms amid strong opposition,” one banking industry official said.

“If the Liberal Democratic Party loses in the election and Koizumi is forced to resign, it might take 10 years for postal privatization to be on the table again.”

The anticipated rejection of the bills had already raised concerns late last week among foreign investors who had been positive about Koizumi’s structural reforms, briefly triggering a sale of Tokyo stocks and bonds and a run in the currency market.

But analysts said the markets would not see further drastic selling due to the country’s positive economic situation.

“The financial markets will absorb the shock (of the rejection) in a couple of days,” said Shinichi Ichikawa, a strategist at Credit Suisse First Boston Securities Ltd. in Tokyo.

Overseas investors view the rejection of the bills as backpedaling on Koizumi’s reforms and the subsequent dissolution of the Lower House as political instability, analysts said.

“But the economic fundamentals are showing positive signs and I don’t expect investors to sell heavily further,” Ichikawa said.

Industry insiders had welcomed the bills, saying they represented the first step toward postal reform. Investors had also hoped the privatization would prompt a money influx into the financial markets.

Because the government had already made compromises with opponents of the bills and failed to establish a detailed timetable of the reforms, the rejection of the package will have a limited impact on the economy, economists said.

“Since the bills do not show a clear blueprint of Japan Post after 2007, I don’t think it would have a big impact on the economy,” said Hiromichi Shirakawa, chief economist at UBS Securities in Tokyo.

“What is most important is to limit the expansion of the postal system, and to reform the overall public financial sector,” CSFB’s Ichikawa said.

As for the political outlook and its impact on the economy, opinions are split.

Ichikawa said a clear LDP victory or clear defeat at the benefit of the Democratic Party of Japan and the DPJ’s subsequent control of the government may have a favorable impact on financial markets. But the markets may take any outcome in between as a sign that reforms will be delayed, he said.

UBS Securities’ Shirakawa said a DPJ victory may deepen political uncertainty, because the party has yet to clarify what economic policy it might pursue.

The bills called for the postal privatization to begin in April 2007 and take 10 years to complete the process.

Japan Post would have been broken into four entities, undertaking over-the-counter services, mail-delivery, postal savings and postal life insurance — all under a holding company owned one-third by the government.

“We are very disappointed by the bills’ rejection. But we will continue to demand that the government reform the extremely large postal savings system, which remains outside the market mechanism,” said a spokesman of the Japanese Bankers Association.

The outstanding amount of postal savings was 211.0 trillion yen as of the end of June, about 41 percent of the 519.4 trillion yen in overall savings at 129 Japanese banks.

European ‘concern’

A European business leader based in Japan voiced disappointment Monday following the House of Councilors’ rejection of legislation to privatize Japan Post.

Institutional investors will conclude that “Japan cannot change, or will not change,” said Jakob Edberg, policy director with the European Business Community in Japan.

As “our biggest concern,” structural reforms in Japan’s financial services sector may be delayed or stopped now that the Upper House has voted down a set of bills to privatize postal services, Edberg added.

The European Business Community represents more than 3,000 European companies and individuals in Japan.

Noting that many companies could have concluded deals with a privatized Japan Post to sell insurance policies and other financial products through post offices, Edberg said; “Many of our members are disappointed that they will not be able to do this right now.”

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