Japan Post’s Stalled Sale a Saving Grace

When a spokeswoman for the International Monetary Fund (IMF) said at a news conference on March 17 that Japan has the financial means to recover from its devastating tsunami, skeptical bloggers wondered what she meant. Was it a polite way of saying, “You're on your own?”

Spokeswoman Caroline Atkinson said, “The most important policy priority is to address the humanitarian needs, the infrastructure needs and reconstruction and addressing the nuclear situation. We believe that the Japanese economy is a strong and wealthy society and the government has the full financial resources to address those needs.”

Asked whether Japan had asked for IMF assistance, she said, “Japan has not requested any financial assistance from the IMF.”

Skeptics asked how a country with a national debt that was over 200% of gross domestic product (GDP) could be “strong and wealthy”. In a Central Intelligence Agency Factbook list of debt to GDP ratios of 132 countries in 2010, Japan was at the top of the list at 226%, passing even Zimbabwe, ringing in at 149%. Greece and Iceland were fifth and sixth, at 144% and 124%. Yet Japan's credit rating was still AA, while Greece and Iceland were in the BBB category. How has Japan managed to retain not only its credit rating but its status as the second- or third-largest economy in the world, while carrying that whopping debt load?

The answer may be that the Japanese government has a captive funding source: it owns the world's largest depository bank. As US vice president Dick Cheney said, “Deficits don't matter.” They don't matter, at least, when you own the bank that is your principal creditor. Japan has remained impervious to the speculative attacks that have crippled countries such as Greece and Iceland because it has not fallen into the trap of dependency on foreign financing.

Japan Post Bank is now the largest holder of personal savings in the world, making it the world's largest credit engine. Most money today originates as bank loans, and deposits are the magic pool from which this credit-money is generated. Japan Post is not only the world's largest depository bank but its largest publicly owned bank. By 2007, it was also the largest employer in Japan, and the holder of one-fifth of the national debt in the form of government bonds.

As noted by Joe Weisenthal, writing in Business Insider in February 2010:

Because Japan's enormous public debt is largely held by its own citizens, the country doesn't have to worry about foreign investors losing confidence.

If there's going to be a run on government debt, it will have to be the result of its own citizens not wanting to fund it anymore. And since many Japanese fund the government via accounts held at the Japan Post Bank – which in turn buys government debt – that institution would be the conduit for a shift to occur.

That could explain why Japan Post has been the battleground of warring political factions for over a decade. The Japanese Postal Savings System dates back to 1875; but in 2001, Japan Post was formed as an independent public corporation, the first step in privatizing it and selling it off to investors. When newly elected prime minister Junichiro Koizumi tried to push through the restructuring, however, he met with fierce resistance. In 2004, Koizumi shuffled his cabinet, appointed reform-minded people as new ministers, and created a new position for postal privatization minister, appointing Heizo Takenaka to the post. In March 2006, Anthony Rowley wrote in Bloomberg:

By privatizing Japan Post, [Koizumi] aims to break the stranglehold that politicians and bureaucrats have long exercised over the allocation of financial resources in Japan and to inject fresh competition into the country's financial services industry. His plan also will create a potentially mouthwatering target for domestic and international investors: Japan Post's savings bank and insurance arms boast combined assets of more than 380 trillion yen (US$3.2 trillion) …

A $3 trillion asset pool is mouthwatering indeed. In a 2007 reorganization, the postal savings division was separated from the post office's other arms, turning Japan Post into a proper bank. According to an October 2007 article in The Economist:

The newly created Japan Post Bank will be free to concentrate on banking, and its new status will enable it to diversify into fresh areas of business such as mortgage lending and credit cards. To some degree, this diversification will also be forced upon the new bank. Some of the special treatment afforded to its predecessor will be revoked, obliging Japan Post Bank to invest more adventurously in order to retain depositors – and, ultimately, to attract investors once it lists on the stock market.

That was the plan, and Japan Post has been investing more adventurously; but it hasn't yet given up its government privileges. New Financial Services Minister Shizuka Kamei has put a brake on the privatization process, and the bank's shares have not been sold. Meanwhile, the consolidated Post Bank has grown to enormous size, passing Citigroup as the world's largest financial institution; and it has been branching into new areas, alarming competitors. A March 2007 article in USA Today warned, “The government-nurtured colossus could leverage its size to crush rivals, foreign and domestic.”

Before the March 2011 tsunami, that is what it appeared to be doing. But now there is talk of reverting to the neoliberal model, selling off public assets to find the funds to rebuild. Christian Caryl commented in a March 19 article in Foreign Affairs, published by the Council on Foreign Relations:

As horrible as it is, the devastation of the earthquake presents Japan and its political class with the chance to push through the many reforms that the DPJ [Democratic Party of Japan] has long promised and the country so desperately needs.

In other words, a chance for investors to finally get their hands on Japan's prized publicly owned bank and the massive deposit base that has so far protected the economy from the attacks of foreign financial predators.

The Battle of the Banks
Before the 1990s, Japan was the world's leading industrial and consumer goods innovator. The Japanese public-private model promised a high standard of living and leisure time for all, with much of the work done by robot-driven machines.

But Japan was also the world's largest creditor, posing a threat to other international interests. The Bank for International Settlement (BIS), the “central bankers' central bank” in Basel, Switzerland, demonstrated in 1988 that it had the power to make or break banks and economies when it issued a Basel Accord, raising bank capital requirements from 6% to 8%. Japan's banks were less well capitalized than other banks, and raising the capital requirement forced them to cut back on lending.

Housing in Japan was in a major bubble. The Basel Accord supplied the pin. When credit collapsed, so did the housing market, creating a recession in Japan like that in the US today. Property prices fell and loans went into default, as the security for them shriveled up. A downward spiral followed, ending with the total bankruptcy of the banks. The banking system had to be rescued by the government. Essentially, the banks were nationalized, although that word was avoided to prevent arousing criticism.

The Nikkei stock market crashed and took Japanese industries down with it. By 2001, Western investors were finally able to penetrate Japanese markets that had previously been closed to them, entering the merger-and-acquisition market to acquire crippled Japanese enterprises. Major public companies were at least partially privatized, including the railway, telegraph and telephone companies; but the government resisted letting go of its vital postal service system.

'Japan's Second Budget'
The history of the Japanese Postal Savings System (JPB) is detailed in a University of Leipzig discussion paper called “Behold the 'Behemoth': The Privatization of Japan Post Bank”.

Founded in 1875, the postal savings banks were quite popular with the Japanese people, and Japan soon had more post office locations than the United States and other countries. Japanese postal savings banks specialized in offering small accounts for low-income households, in competition with private savings banks that paid higher interest rates but were considered less safe than the government's postal savings system.

Postal savings banks were also attractive to savers because they offered special time deposits called teigaku savings, or “fixed amount postal savings”, on quite favorable terms. These were 10-year time deposits from which depositors could withdraw funds on short notice without penalty, making them very liquid and reducing interest-rate risk. There was a formal limit of 10 million yen in postal deposits per individual or household, but it was not rigorously enforced; and wealthy savers could circumvent it by holding multiple accounts.

JPB formed the basis of a unique and opaque system of borrowing and lending, which operated as a “shadow” banking system sometimes referred to as “Japan's second budget”. Postal savings were channeled into government-related banks or forwarded to various government-affiliated institutions, where lending was guided by the Japanese Ministry of Finance (MoF). Formalized after the Second World War and named FILP, this system turned postal services into “a huge, opaque pool for funding for various policy lending purposes”.

Unlike the national budget, budget allocation to FILP did not require parliamentary approval. Funds were channeled to local governments, government-affiliated public companies, and government financial institutions acting as highly specialized lenders. Although many countries have government-sponsored loan programs, the Japanese program was remarkable for its size. By 2001, the FILP program involved over 400 trillion yen, a sum equal to 82% of Japan's GDP.

That was the year Japan Post was formed as a newly independent public corporation; but it was still owned by the government, and employees retained their status as public servants. New regulations encouraged government agencies that had relied on FILP loans to issue their own securities, and FILP agencies no longer had automatic access to postal savings funds. But Japan Post bought the bonds issued by the government agencies, and the flow of funds was largely unchanged.

The Battle Over Privatization
What followed was described by Christian Caryl in his article in Foreign Affairs:

Under the Liberal Democratic Party (LDP) – the party whose cadres ruled Japan almost continuously from the party's formation in 1955 to its defeat in a general election two years ago – politicians, bureaucrats, and corporate leaders developed a powerful web of patronage and interconnected interests, which ended up funneling taxpayer money into public works projects of dubious justification.

But … Japan's political culture began to change ten years ago, when Junichiro Koizumi, then LDP's leader, won a remarkable election victory by vowing to dismantle his party's entrenched establishment and the vested interests that propped it up. (On the eve of the election, Koizumi famously declared that he would “destroy the LDP.”) He pushed through a vital restructuring and privatization of Japan Post, which is not only Japan's postal service but the world's biggest savings bank by assets and the source of much of the funding for public works.

When Koizumi met with resistance, he vowed to “discipline” opponents. When the Upper House of the Japanese Diet did not pass his privatization bills, he dissolved the Lower House and called for a general election. A few weeks later, his postal privatization plans passed both chambers of the Diet.

The privatization plan was begun in 2007 and was supposed to end in complete privatization of Japan Post by 2017. Caryl observes:

Among its other effects, Koizumi's reforms expanded the political and cultural space for a genuine two-party system – an opening that was seized by the Democratic Party of Japan, which had gradually evolved into a credible force since its formation in 1998. The DPJ is now led by Prime Minister Naoto Kan, who since the start of the current crisis, has failed to give an entirely convincing performance. He has oscillated between forceful displays of leadership and indecisiveness.

The DPJ's indecisiveness was evident in its handling of Japan Post. The DPJ appointed Shizuka Kamei, the leader of a junior coalition party called People's New Party, as the minister responsible for the post office. Mr Kamei then proceeded to freeze the postal privatization.

Michiyo Nakomoto, writing in the Financial Times on April 5, 2010, said, “There was always going to be disagreement between the DPJ, whose core members believe the post office's bank and insurance companies should be scaled back to revitalize the private sector, and Mr Kamei's PNP, whose prime goal is to expand the post office's influence.”

But Mr Kamei and his junior party had the upper hand in this debate. Mr Nakamoto wrote in the Financial Times on September 20, 2009:

Mr Kamei … has been particularly vocal about the need to reverse course on postal privatization. …

The minister has also been vocal on the need to support struggling small and medium-sized companies, fuelling concerns that the government would adopt a socialist approach to the private sector.

Of particular alarm to some critics have been Mr Kamei's remarks suggesting that the government would shelter SMEs [small and medium-sized enterprises] facing financial problems via a temporary moratorium on loan repayments.

“When the lender is in trouble, we will rescue them with taxes and when the borrower is in trouble, we will grant them a reprieve [on their loans]. That is the natural thing to do,” Mr Kamei told the Nikkei business daily at the weekend.

In an April 2010 article in The Australian, Peter Alford called Kamei “the man who masterminded a major change to Japan's public finance arrangements in the guise of restructuring postal services”. Alford wrote:

It was accepted that he would halt and disable the previous government's privatization program to separate and sell the bank and insurance businesses by 2017.

But now, without any apparent consultation with … other fiscal and administrative policy ministers, he has moved to significantly alter private savings behavior and public funding capability. …

The irascible 73-year-old Financial Services Minister proposed – well, demanded, actually – that Japan Post Bank's individual deposit limit be raised to Y20 million ($230,000) and Japan Post Insurance's maximum policy coverage rise to Y25m.

In doing so, he has significantly expanded Japan Post's capacity to use those savings and premiums to finance public debt.

As of March 31 last year, 74% of the postal bank and postal insurer's combined assets of Y303 trillion (that's right, $3,480 billion) were held in Japan government bonds (JGBs) and another 4% in local government bonds.

Utilizing the post office's 24,000 shop fronts, Japan Post Bank (the world's largest savings bank) and Japan Post Insurance (the nation's largest personal insurer) held Y280.2 trillion of deposits and insurance reserves, equivalent to 19% of Japanese household financial assets. …

Kamei justified the move by saying, “The reality is we issue a massive amount of Japan government bonds and we need someone to buy them – we should be thankful the Post Office is willing to buy.”

Kamei's bold move was good for the government and good for the people, but its foreign and domestic competitors were not pleased. A coalition of organizations representing American, Canadian and European business interests objected that the proposal disregarded “international best practices to ensure equal competitive conditions” and raised “new and serious questions regarding Japan's commitment to fulfilling its international GATS [General Agreement on Trade in Services] obligations.”

Michiyo Nakamoto wrote in the Financial Times in May 2010:

In a last ditch effort to stall the expansion of Japan's post office bank, seven financial associations, representing all manner of private sector banks, on Thursday issued a joint statement opposing the government's decision to significantly enlarge the bank's role in financial markets.

The private sector banks are fuming at the government's decision to raise the maximum that can be held in an account at the postal bank from Y10m ($112,000) to Y20m and allow the lender into a wider range of businesses than it has been permitted to engage in so far.

They argue that the government's stake, which is currently at 100%, gives the postal bank almost a state guarantee that will encourage depositors to shift their savings out of private banks into the post bank. They are also worried that the post bank, the country's biggest bank by deposits, will encroach on the few profitable areas of banking business in Japan's sluggish economy.

Japan Post Bank started diversifying away from low-interest government bonds into more lucrative investments. In December 2010, sources said it was considering opening its first overseas office in London, “aiming to obtain the latest financial information there to help diversify its asset management schemes.”

But that was before the crippling tsunami and the nuclear disaster it triggered. Whether they will finally force Japan Post's privatization remains to be seen. Other vulnerable countries have sold off their assets only to wind up in debt peonage to outside creditors.

The Japanese government can afford its enormous debt because the interest it pays is extremely low. For the private economy, public debt IS money. A large public debt owed to the Japanese people means Japanese industries have the money to rebuild. But if Japan Post is sold off to private investors, interest rates are liable to rise, plunging the government into the debt trap it has so far largely escaped.

The Japanese people are intensely patriotic, however, and they are not likely to submit quietly to domination by foreigners. They generally like their government because they feel it is serving their interests. Hopefully the Japanese government will have the foresight and the fortitude to hang onto its colossal publicly owned bank and use it to leverage its people's savings into the credit needed to rebuild its ravaged infrastructure, avoiding a crippling debt burden to foreign interests.