Victory for Koizumi, but delivery is delayed

Jul 5th 2005
From The Economist Global Agenda

Junichiro Koizumi has narrowly won parliamentary backing for his plan to privatise Japan Post, the world’s largest financial institution. Removing such a large chunk of cash from the state’s grip will cause potential problems for rival banks and insurers, and upheaval for Japan’s ruling party. But the process will not be complete for another 12 years

THE privatisation of Japan’s postal monopoly has long been the overriding political ambition of Junichiro Koizumi, prime minister since 2001. He has called it the country’s biggest reform in a hundred years and thus regards it as the centrepiece of his legislative programme. So Mr Koizumi must have felt a huge sense of relief when, on Tuesday July 5th, his postal-reform bill squeezed through the lower house of parliament, by 233 votes to 228. He had pulled out all the stops to get it passed. Cabinet members who had been minded to vote against the measure were warned that they would be “severely punished” if support was not forthcoming—a couple chose to resign over the matter. Despite Mr Koizumi’s insistence that a defeat for his bill would be tantamount to a no-confidence vote, some 40 members of his ruling Liberal Democratic Party (LDP) opposed the legislation.

This level of opposition might seem surprising, given that the privatisation is not due to take full effect until 2017. But then, Japan Post holds a greater sway over the country’s financial and political system than would a service that merely transported letters and parcels. As well as providing mail and over-the-counter services at some 25,000 post offices, it is the world’s biggest financial institution by far, with assets of around ¥386 trillion ($3.6 trillion). Turning its banking and insurance services over to the private sector is set to cause considerable upheaval as an enormous dollop of money under the aegis of the state is exposed to the market. Mr Koizumi’s bill will split Japan Post into four separate units by 2007: banking, insurance, post delivery and post offices. The banking and insurance arms will be sold off completely by 2017.

Much of the criticism of Japan Post’s role as the leading savings bank and life-insurance provider is based on the misallocation of resources in a country where the financial system is under considerable strain. The company holds deposits of ¥265 trillion in individual savings accounts, some 30% of the national total. Yet Japan Post is exempt from paying most taxes and contributing to state-backed deposit-insurance schemes. This provides the group with an implicit subsidy that is not enjoyed by rival financial institutions. Similarly, Kampo, the firm’s life-insurance scheme, has assets of ¥121 trillion, some 40% of the total, which are also under government guarantee.

Banks have insisted that this assistance must go before Japan Post’s banking arm is allowed to compete freely and offer a wider range of financial services. In a banking system that is plagued by bad loans, fears persist that a huge new bank with limited experience of assessing credit risk will make poor decisions, and that this will exacerbate a problem that Japan’s commercial banks are only tackling slowly after a string of failures, nationalisations and mergers.

On top of this, banks complain that they do not even fall under the same regulatory regime as Japan Post, which comes under the auspices of the internal affairs and communications ministry rather than Japan’s perhaps less lenient banking regulator, the Financial Services Agency. Furthermore, Japan Post has a much larger network of branches than its potential rivals. Banks fear that the giant new competitor’s in-built advantages may force some of them out of business.

Domestic insurers have already suffered from the advantageous position of Kampo. Many collapsed in the 1990s under the twin burdens of competing with a firm that could offer its customers better deals because of government backing while, like its banking stable-mate, not being subject to taxes or an industry-wide insurance scheme. Foreign firms, which have carved out businesses in other areas of insurance that are unaffected by the subsidies handed to Kampo, are concerned that a privatised entity could use its substantial revenues from existing policies to compete unfairly. As for the shipping of goods, rather than financial services, some fear that a large and inefficient post office, fat with subsidies, might move into other delivery-based industries such as logistics, to the detriment of unsubsidised rivals.

Some measure of subsidy is sure to be retained to keep less well patronised rural post offices in business. Even so, job losses among Japan Post’s 400,000 employees are bound to follow. This is tricky for the LDP as many of these workers are staunch supporters of the party, and rural postmasters are useful in mobilising support for it. Just as worrying for the LDP, much of Japan Post’s savings and insurance revenues have gone towards buying government bonds that in turn financed public-works projects of questionable merit (other than to bolster the support of the LDP’s rural voters). A privatised Japan Post could not be used in this way. All of which worries LDP politicians, who have witnessed an improvement in the fortune of the country’s biggest opposition party, the Democratic Party of Japan (DPJ), and fear that Mr Koizumi’s grand plan will only make things worse. Just before the vote, the DPJ made substantial gains in elections for Tokyo’s city assembly, reinforcing those fears.

The bill to privatise Japan Post will now go before the upper house of parliament. If it rejects the bill, Mr Koizumi has threatened to dissolve the lower house and call a snap election. But the upper chamber is likely to wave it through, because although the LDP has a smaller majority there, its leaders are better able to impose party discipline. Nobody in the LDP wants an election right now, especially given the inroads made by the DPJ lately. And the prime minister’s popularity rating with the public, though below 50%, still exceeds that of his party.

On the other hand, losing the support of postal workers and rural voters as the effects of privatising Japan Post are felt is equally worrying to the LDP. That is why Mr Koizumi had to compromise on the timetable and will not get to see full privatisation until 2017—a long way off, even in a country where moving reform up to a snail’s pace would count as reckless acceleration.

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