A review of the nation’s eight government-affiliated financial institutions is gaining momentum in response to Prime Minister Junichiro Koizumi’s drive to abolish, integrate or privatize them. Shortly after Mr. Koizumi took power in 2001, he included the reform of those institutions in his “reform without any sanctuaries” plan. But action on this front was temporarily halted by a prolonged economic slump. The Council on Economic and Fiscal Policy, chaired by the prime minister, has begun conducting full-fledged discussions on the matter. The government and the Liberal Democratic Party are expected to work out a basic policy by the end of November, and the new form of such financial institutions will take shape in fiscal 2008.
In the past, these institutions played a role in the development of some industries and local economies, helping to stabilize people’s lives. But there is less need for their services today. Critics also contend that these institutions are “stealing” business opportunities from commercial banks.
The financial institutions in question procure funds from postal savings and insurance by issuing bonds, then lend money with interest rates and repayment periods more advantageous to the borrowers than what commercial banks offer. Some of them lend money to medium-size and small enterprises, farmers and fishermen, and publicly-run local enterprises. Others offer long-term funds for projects of a public nature, including funds for development projects in Okinawa, as well as export, import and ODA-related financing.
Profitability is so high in the field of financial services for medium-size and small firms that competition has become fierce between commercial banks and government-affiliated financial institutions. Commercial banks complain that the low-cost of fund procurement enjoyed by government-affiliated institutions and the low interest rates they offer make it difficult for private-sector banks to compete.
The government-affiliated institutions also receive a level of protection from the government that is unthinkable in the private sector. When they run deficits, they receive subsidies from the government to make up for them. Five of the eight institutions received more than 120 billion yen in such subsidies in the fiscal year that ended in March.
As of the end of March, the eight institutions’ outstanding balances of loans stood at about 90.2 trillion, yen equivalent to 17 percent of the nation’s gross domestic product. This amount is higher than the corresponding figure of about 83 trillion yen for the Mitsubishi UFJ Financial Group, which formed this month with the largest assets in the world. When compared with the 5 to 8 percent share in GDP for government-affiliated financial institutions in the United States, Britain and France, it is clear that the Japanese institutions are bloated. One of the major goals of the reform is to halve their share of GDP.
Although the Council on Economic and Fiscal Policy in 2002 laid down an outline of the reform, it did not materialize because the government-affiliated financial institutions were helping enterprises that could not secure loans from commercial banks, which were still struggling with a heavy overhang of large bad loans stemming from lax lending during the bubble period. Today, however, some loans extended by those institutions have become sour while major commercial banks have almost disposed of their nonperforming loans. Given this situation, reform appears inevitable.
As the council deepens discussions on which institutions to abolish or privatize and which to merge, strong resistance will be put up by the government ministries that have jurisdiction over them, as well as by LDP Diet members who represent the interests of recipients of the financial services offered by those institutions. In a practice dubbed as “descent from heaven,” retired high-ranking bureaucrats occupy nearly half of the 84 executive posts in the eight institutions. The top jobs at five institutions are held by three former bureaucrats from the Finance Ministry, one from the Economy, Trade and Industry Ministry and another from the Agriculture, Forestry and Fisheries Ministry. Abolition and integration of those institutions means fewer posts for former bureaucrats.
As the council’s outline proposes, government-affiliated financial institutions should be allowed to remain only in fields where financed projects have high public benefits and their risk assessment makes it difficult to obtain private-sector financing. If the number of these institutions is drastically reduced but their aggregated services remain bloated, reform will not have been accomplished.
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