The planned privatization of the postal system, which doubles as the world’s biggest savings bank, was hailed around the globe as a watershed free-market reform that would streamline the world’s No. 2 economy.

But just months before the October kickoff date, a darker prospect looms over what will unseat Citigroup Inc. as the world’s biggest financial institution. Far from encouraging open competition, some are warning that the government-nurtured colossus could leverage its size to stamp out rivals, foreign and domestic.

Washington is pressuring Tokyo to ensure that won’t happen, and Japan is promising strict safeguards. Yet uncertainties about how the 10-year privatization plan will unfold are fueling fears of a new Japan-U.S. trade row.

“We are monitoring it very closely,” U.S. Trade Representative Susan Schwab told U.S. Congress last month.

Japan’s postal privatization “is fine in theory, unless it turns out they are creating an unfair advantage, an unlevel playing field,” Schwab warned. “We will, if necessary, seek litigation.”

Japan Post does more than sell stamps and deliver letters. It also runs a postal savings bank with 500 million accounts and some 4,000 branch offices nationwide. Its ubiquitous post offices effectively act as sales agents for insurance and investment products as well as stamps. Japan Post started selling investment trusts at just 551 post offices in 2005, but had expanded that to 1,155 branches by last October.

For millions of Japanese, the post office is their only bank. The service has become a symbol of the government’s benevolent patriarchal side and is especially popular in rural areas shunned as unprofitable by commercial banks.

Sitting on assets of 227 trillion yen, Japan Post secures about 28 percent of Japan’s household savings and is widely billed the world’s largest bank.

Privatizing the behemoth was the centerpiece reform in 2005 when then Prime Minister Junichiro Koizumi pushed it through the Diet. The first phase begins Oct. 1, with Japan Post being broken into four separate businesses — an insurance company, savings bank, mail courier and post office management company.

Initially held under a holding company, they will made independent by 2017.

Economists applauded the move as encouraging Japanese — long used to stashing cash in the bank for miserable interest rates — to turn to more productive investments such as stocks. It would fuel competition and be a boon to foreign banks and investment companies hoping to scoop up new clients.

The huge pot of savings is up for grabs at a time of booming demand for higher returns. For decades, Japanese looked at stock trading as a form of gambling, but more are turning to stocks and mutual funds.

That means big money for foreign banks and insurance companies.

Fireworks could begin next month, when Japan Post releases its first detailed business plan.

“I expect a lot of complaints,” said Nobuyuki Kinoshita, director general of the Cabinet-level office overseeing postal privatization. “This is a kind of dialogue. First we need the business plan.”

Business leaders are reluctant to openly criticize yet-decided details. But privately, they air a laundry list of concerns — many that echo a report the U.S. trade representative issued Tokyo in December.

They want assurances the new companies won’t get tax and regulatory breaks denied private competitors.

They are also worried Japan Post will be allowed to encroach on rivals by introducing new investment services and new insurance products before a level playing field is created.

There is additional concern the new companies will exploit implicit government guarantees on deposits to lure new customers. Basic deposits at commercial banks, by contrast, are only insured up to 10 million yen. Even after October, the government will hold 100 percent of the companies until shares are sold on the stock exchange, starting as late as 2011.

Another issue is whether foreign firms will have equal footing to sell investment products through the newly privatized bank. So far, they have been granted only a minor role.

When Japan Post began selling investment trusts in 2005, Goldman Sachs Asset Management was the only foreign firm chosen from a dozen that applied to sell their funds, including Fidelity Investments, State Street Corp. and Merrill Lynch Investment Managers.

If the reorganized Japan Post becomes an international player, it will be largely because of the advantage built during its government-monopoly days, Robert B. Cohen of the Washington-based Economic Strategy Institute wrote in a paper last summer.

Kinoshita said concerns about fair play are misplaced because postal privatization is predicated on “equivalent conditions of competition.” Gray areas, such as what new businesses will be allowed, will be sorted out by an independent panel of experts charged with deciding what actions “enhance consumer convenience.”

“The principle is written in the law,” Kinoshita said. “This is excessive worrying.”

But Japan Post’s ambitions should not be underestimated. Kazuharu Matsuoka, senior manager of Japan Post’s investment trust division, said last year “we aim for a level that would surpass top megabanks.”

Its finances are extraordinarily sound. Profit jumped 56 percent to 1.93 trillion yen in the fiscal year that ended on March 31, 2006, thanks largely to income from the new trust funds.

Some foreign companies are already digging in for a fight.

Just this month Citigroup Inc. announced it would pay up to $13.35 billion to take full control of Nikko Cordial, Japan’s third-largest brokerage.

Citigroup has retail banking, credit card businesses, securities and other operations in Japan. But even this global giant remains a tiny presence. It’s betting that taking control of Nikko Cordial’s 100 branches nationwide will give it a leg up in competing against the soon-to-be unleashed Japan Post.

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