Postal privatization retreat assailed by finance sector

Critics see distorted interest rates, no hope for a 'level playing field'


The decision by Prime Minister Yukio Hatoyama and his Cabinet to roll back postal privatization has infuriated private financial institutions that assume there won’t be a level playing field if the government keeps its stake in Japan Post’s savings and insurance units.

The government decided March 30 to revise the postal reform plan initiated by Junichiro Koizumi, who as prime minister championed structural reform toward a more market-oriented economy.

Under the new plan, based on a proposal by postal reform minister Shizuka Kamei, the maximum amount of postal savings per person that Japan Post Bank can accept will be doubled to ¥20 million. The plan also raises the maximum “kampo” postal insurance payout to ¥25 million from ¥13 million.

The government is also likely to hold on to more than a third of the postal group’s shares in a turnaround from full privatization. The bill with the latest changes is expected to be submitted to the Diet later this month.

Experts warn that if the massive postal group, with its pool of hundreds of trillions of yen, attracts even more money, it would not only hamper private-sector financial businesses but also loosen the government’s fiscal discipline through increased purchases of government bonds and accelerate wasteful spending on public works projects.

Economists are especially alarmed that the government appears to be moving toward holding a huge stockpile of the people’s money to spend at its discretion.

“The revision will be a turning point for the worse,” says Naoko Nemoto, a banking analyst at rating agency Standard & Poor’s in Japan.

The deep misgivings over public spending originates from the way postal savings were used for years, she says.

The money had long been used to fund unnecessary public projects such as highways, bridges and airports in the middle of nowhere via the Finance Ministry’s “zaito” fiscal investment and loan program, which was reformed in 2001.

The postal group’s lack of expertise in investment and financing, however, could lead to massive bad loans, which eventually would have to be offset by taxpayer money, Nemoto says.

History provides a telling lesson, she says, citing Shinginko Tokyo Ltd., which was established by the Tokyo Metropolitan Government at the initiative of Gov. Shintaro Ishihara in 2005 after purchasing a unit of the French banking group BNP Paribas. The aim of the public bank was to support small local companies strapped for cash, but all it did was build up bad loans.

Nemoto says creating an even bigger public financial entity is risky because it would also distort the entire interest-rate structure of financial markets, where loans with higher risks should reflect higher returns.

If a public institution extends loans with below-market interest rates to support certain industries, commercial banks find it really tough to charge high rates to gain high returns, she says.

Understandably, commercial banks are alarmed.

Katsunori Nagayasu, chairman of the Japanese Bankers Association, said in a statement that he opposes raising the ceiling on postal savings deposits because it will hamper fair competition and spark an outflow of funds from private banks, pour cold water on lending to smaller firms and hurt regional economies.

Tadashi Ogawa, chairman of the Regional Banks Association, says raising the deposit cap is “truly regrettable” because small regional banks will especially be affected in times of financial crisis because depositors may flee to Japan Post Bank.

The looming changes to postal reform have also raised concerns in Washington.

Last month, a U.S. government trade report urged Japan to ensure “a level playing field” between the Japan Post group and private firms, especially in the insurance sector.

“The U.S. government has long-standing concerns about the postal insurance company’s impact on competition in Japan’s insurance market and is continuing to monitor closely the implementation of reforms,” it said.

Yasuhide Yajima, a senior economist at NLI Research Institute, points out that raising the caps on postal savings and insurance may also lead the group to increase its holdings of Japanese government bonds, which would induce the government to loosen its fiscal discipline and slack off from trying to cut the huge deficit.

But Hatoyama said March 30 the postal group shouldn’t act as an underwriter of JGBs, and instead should play a bigger role in getting funds into the hinterlands.

Kamei and internal affairs minister Kazuhiro Haraguchi want the postal savings and insurance units to “utilize a fund” to help finance growth businesses in rural areas.

Indeed, comments by Cabinet ministers show they are playing with the idea of setting up something like a sovereign wealth fund — a fund usually owned by a central bank or a government budgetary account through which the government can invest in a wide range of financial products.

On March 26, transport minister Seiji Maehara said some sort of sovereign wealth fund for investing in foreign natural resources and infrastructure, including power stations, railroads and highways, “would be a good way to spend money.”

But creating such a fund would mean a shift in the postal group’s investment from mostly JGBs to a wider range of products, which would likely expose depositors’ savings to high risks, experts say. At present, postal savings accounts are only insured up to their current ceiling of ¥10 million.

“Who would take responsibility if the fund suffers a huge loss?” asks Hirotaka Shimazu, a research fellow in the Tokyo Foundation’s policy research division. A large loss would result in a government rescue of the postal fund with taxpayer money, he says.

“Postal savings were originally created to act as a purse for regular people. Risky investments won’t meet that goal,” he adds.

The government hasn’t decided yet whether it will create such a fund. Also, it is still unclear what kind of fund, if any, would be set up.

Overseas sovereign wealth funds include the Abu Dhabi Investment Authority, the Saudi Arabian Monetary Agency and China’s State Administration of Foreign Exchange.

In the U.S., such funds had gained attention since the Lehman shock because foreign sovereign funds had invested in crisis-hit U.S. banks such as Citigroup, Morgan Stanley and Merrill Lynch.

Yajima of NLI says lawmakers have reason to raise the notion of a national fund.

“What the government is trying to do is obvious,” he says. “Raising the caps on postal savings and insurance and retaining the government’s shareholding show the government’s intention to help Japanese industries without increasing the budget and without selling off its holdings of government bonds.”

Because of the already massive public fiscal debt — at 181 percent of gross domestic product the highest among developed countries — the budget can’t be any larger, Yajima says. At the same time, sales of JGBs would lead to a jump in long-term interest rates, which would further hurt the economy, he says.