Central bank governors aren’t supposed to participate in initial public offerings. But Haruhiko Kuroda could just be the main winner from Japan’s biggest in 30 years.
For 31 months now, the Bank of Japan head has struggled to gain traction with unprecedented monetary stimulus efforts. The $700 billion of Japanese government bonds Kuroda buys each year is proving no match for a two-decade deflationary funk. One reason is that the BOJ is literally having a hard time finding enough JGBs to buy. The main financial asset held by banks, pensions, insurance companies, universities, endowments, government institutions and households are in shorter and shorter supply in the secondary market.
That’s why Japan Post’s $12 billion IPO couldn’t come at a better time for Kuroda. The giant savings bank inside a state-owned company employing 400,000 people has long been the biggest hoarder of JGBs. Now, as the privatization process unfolds, that bank will be under pressure for higher returns. Expect it to accelerate sales of JGBs, municipal and other public securities that as of April amounted to almost $1 trillion. April is important because it marked the second anniversary of Kuroda’s failing deflation battle.
State-owned Japan Post Holdings and its two financial units listed on Wednesday. It is the world’s biggest initial public offering this year and Japan’s largest in nearly 20 years.
Having more debt to buy up to add liquidity to the economy is the first of four reasons this IPO marks a pivotal moment for Japan’s economy.
Second, pressure on regional banks. Japan is as overbanked as developed nations come. It features about 100 sleepy regional institutions, 84 of which are publicly traded. Decidedly conservative and bureaucratic, they’re too often where BOJ liquidity goes to die. Too traumatized by the bad-loan crisis of the 1990s to lend, they stuff the vast majority of BOJ stimulus in JGBs. Once safely ensconced in government bonds, BOJ money sits idle and deprives Japan of the so-called multiplier effect that makes tweaks in short-term rates so powerful.
Japan Post’s foray into the private sector will shake up this staid existence. This privatization will be phased in slowly, meaning the postal savings bank will continue to benefit from an implied government guarantee. As unfair as that sounds to competitors, this behemoth’s arrival could prod banks to consolidate. That wouldn’t just increase efficiency and profits, but up the BOJ’s firepower. Japan is littered with proud regional names dating back decades, or centuries in some cases, that fight merger attempts at all costs. Backed by trillions of dollars of savings, Japan Post will force the creation of bigger and stronger rural banks with greater incentives and confidence to extend credit.
Third, it puts Japan back on the map. Since returning to power in 2012, Prime Minister Shinzo Abe has rarely missed a chance to declare Japan open for business again. Thanks to the foresight and legislative savvy of his predecessor, Junichiro Koizumi, Abe now has some serious bragging rights to buttress the argument. The biggest IPO since Alibaba jibes with Abe’s narrative about a renaissance in the third-biggest economy. The stock’s jump on the day of its debut — by as much at 17 percent at times — can only help.
While much remains to be done, reform-wise, such headlines could convince acquisitive executives overseas to look this way. Even with the yen down 30 percent, Japan has seen no big inbound mergers-and-acquisitions attempts. Most of the attention Japan Inc. is getting overseas concerns Takata’s deadly air bag crisis, Toshiba’s accounting scandal and Sharp’s travails. Here’s a chance for Abe to harness some rare good buzz and reboot his flagging “Abenomics” program.
Fourth, showing what’s possible. In 2001, a new Japanese leader with a dream and ragtag group of disciples risked it all by going after politicians’ favorite piggy bank. The postal savings system was the place wayward lawmakers went to fund pet projects to win votes. It financed countless white-elephant projects that shackled Japan with the world’s biggest public debt. All that largess also deadened the urge for change in Nagatacho, Tokyo’s answer to Capitol Hill. Koizumi endeavored to clean up politics and enliven the economy — efforts that are now coming full circle.
Tokyo needs more of this thinking. While the epochal change Koizumi sought is a work in progress, Wednesday’s IPO reminds Tokyo to think big and act boldly. Abe has talked grandly about shaking up labor markets, changing tax codes and inspiring a startup boom, but pulled off few concrete policy shifts. Considering Koizumi’s big reform win took 15 years to pay off, it’s imperative that Abe move now.
William Pesek, executive editor of Barron’s Asia, is based in Tokyo and writes on Asian economics, markets and politics. www.barronsasia.com .
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