The Diet has begun debating postal services reform, the most important issue of its current regular session. The question at stake is how best to privatize the mammoth system that provides savings, insurance and mail services. It is a question that will deeply affect financial markets in Japan as well as the government’s administrative and fiscal reform program. Yet Prime Minister Junichiro Koizumi’s privatization agenda remains fuzzy.

During a plenary debate in the Lower House, Mr. Katsuya Okada, president of the opposition Democratic Party of Japan, pointed out that the general public does not truly understand why postal services need to be privatized. In a nationwide poll of local-government heads earlier this month, more than 60 percent of the respondents complained about the lack of specifics.

Mr. Koizumi’s privatization plan, which he explained in his policy speech at the outset of the Diet session, is based on the guidelines approved by the Cabinet last September. It calls for dividing the postal system into four operating units: Three would handle mail, savings and insurance services, and one would run the post offices that provide these services over the counter. All four would be placed under the control of a holding company wholly owned by the government, beginning in April 2007.

Within 10 years, the government’s stake in the holding company would be reduced to one-third; the savings and insurance units would be fully privatized to compete freely with other companies; and universal mail service would be maintained. The “savings bank” and the insurance company would assume new obligations, such as paying into deposit-insurance and policyholder-protection funds.

It remains unclear, though, what would happen to the privatized savings and insurance companies, and to the post offices that provide their services. Might the companies serve selected regions in order to operate efficiently? The 25,000-odd post offices throughout the country could not opt to do the same. About 19,000 of them are small offices that depend mainly on financial services for revenues because they do not collect and deliver mail. To avoid bankruptcy they might consolidate.

Privatization is a matter of life and death for these small post offices. It is also a critical issue for 390,000 postal employees (250,000 are national civil servants and the rest are part-time workers). That is why the ruling Liberal Democratic Party — which looks to the small post offices as a base of electoral support — is calling for “maintaining” all three services as well as the post-office network.

The government cites “diversification of post offices” as a way of securing new sources of revenues. Among the suggested options are “providing proxy administrative services for municipal administrations and running convenience stores and travel agencies.” These suggestions, though, would probably apply only to post offices in urban areas where such business opportunities are more likely to avail themselves.

In depopulated areas, such as remote islands and mountainous villages, there are no private banks and convenience stores, and post offices are the only place to get over-the-counter service for any number of items related to parcel mail, savings and pensions. The question is how to maintain these services in isolated areas.

The guidelines say standards for establishing post offices will be “clarified” as reform bills are drafted. Such rules should be proposed without delay. Alternative plans for post offices in remote areas also should be formulated as soon as possible. In some cases, financial support may be required to help ease the impact of privatization.

The proposed savings and insurance companies face a crucial question: Can they survive without benefit of the best expertise in asset management and assessment? Even if they can, won’t their overwhelming assets — 230 trillion yen in savings deposits and 120 trillion yen in insurance contracts — disrupt private markets? The entry of these financial behemoths as private competitors, according to some market watchers, will be like releasing a whale into a pond.

Splitting them into smaller regional units is one way to reduce the impact. The government, however, is leaving their disposition to future management. The financial community argues that the savings system should be downsized or dismantled, or absorbed by private companies. Prime Minister Koizumi and others stress the need for “bold action.” The first order of business is to clarify the matters that remain vague.

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