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FINANCE Rocky Starts Post’s Bank/ Units By SAKAI Katsuhiko

A privatization program started on expansion was the fixed-amount savings itability is remarkably inferior. Its October 1, 2007, for Japan’s postal sys- account created in 1941 to raise funds financial profile is vulnerable. Of Japan tem that had remained a public entity for World War II. The maximum term Post Bank’s assets for investment, ¥130 for 136 years. has thus trans- to maturity is 10 years. Withdrawal can trillion, more than 70%, has been formed itself into the Japan Post Group be accepted after the first six months. invested in Japanese government bonds. that consists of Co. An interest rate is fixed and compound- In this sense, is a giant and its four subsidiaries, with some ed semiannually. With these attractive institutional investor rather than a 24,000 offices, 240,000 employees and features, the fixed-amount postal sav- megabank. It is thus vulnerable to huge ¥330 trillion in total assets. The hold- ings account has become a highly liquid appraisal losses on a bond market ing company is still 100% owned by the savings instrument that commercial decline. If a yield on the benchmark government. Among the four sub- banks cannot offer. In the early 1990s 10-year JGB issue rises from present lev- sidiaries, Japan Post Bank Co. and Japan just before the economic bubble burst els below 2% to 4% on a bond market Post Insurance Co. will seek to imple- in Japan, the annual interest rate decline in the next five years, Japan Post ment their respective initial public offer- exceeded 6% on the fixed-amount Bank’s net profit is estimated to fall to Aings within fiscal 2010 ending in March postal savings account and the savings ¥78 billion from the present projection 2011. Their privatization may be com- ceiling was raised to ¥10 million per of ¥304 billion for fiscal 2011 ending in pleted by the end of September 2017. depositor. Massive funds thus flew into March 2012. But the privatization will not be so easy. the postal savings instrument. As banks Japan Post Bank is willing to offer The largest problem is that they are far went bankrupt with interest rates low- housing and card loans to diversify bigger than their rivals. The two finan- ered in the 1990s, the fixed-amount earnings sources. But long-standing cial firms that have grown too big with postal savings continued to swallow commercial banks are embarrassed. government support will have to be funds from the private sector on the “Japan Post Bank is too big to do the integrated into market economy order. strength of the government’s backing. same as an ordinary commercial bank,” This is a grandiose test. Regulatory Interest earnings from the instrument says Oku Masayuki, who chairs the authorities, financial industries at home were accumulated at a fast pace. Japanese Bankers Association. “The and abroad, and financial market play- The kampo postal life insurance sys- bank should give priority to improving ers are closely watching the test with tem has expanded along with the postal its business efficiency rather than to both hopes and worries. savings system amid difficult business offering new services.” Regional banks conditions for private-sector life insurers and shinkin bank credit associations are World’s Biggest Bank in Deposits in the 1990s by taking advantage of the strongly opposed to Japan Post Bank’s popular endowment insurance policy possible lending services. The Bank of Japan Post Bank has ¥188 trillion in that offers both death security and sav- Yokoyama, the largest among regional deposits against ¥100 trillion at the ings functions. , banks in Japan, has decided on a ¥15 Bank of -Mitsubishi UFJ, ¥66 which has taken over the system, boasts billion brand campaign, its biggest in trillion at Sumitomo Mitsui Banking ¥114 trillion in gross assets, far bigger 50 years, to tackle competition from Corp. and ¥53 trillion at Mizuho Bank. than ¥50 trillion at Nippon Life Japan Post Bank. Small regional banks The deposit comparison between Japan Insurance Co. that had been the largest are teaming up to counter the new Post Bank and the nation’s three biggest insurer in Japan. megabank. megabanks indicates Japan Post Bank is The business environment is not remarkably large. It is the biggest in the Rivals Growing Wary comfortable for Japan Post Insurance world in terms of deposits, accounting either. Its mainstay endowment insur- for a quarter of Japan’s outstanding While Japan Post Bank has joined the ance has become less attractive as a sav- household deposits. commercial banking industry, its posi- ings instrument as investment returns In contrast to the US postal savings tion in the industry has remained vague. have deteriorated since the burst of the system that had supplemented private- Its annual net profit after the privatiza- economic bubble. Demand for death sector before its termi- tion is estimated at the ¥300 billion security has declined in the aftermath of nation in the mid-1960s, Japan’s postal level, far less than ¥670 billion posted the falling birthrate and aging popula- savings system has consistently expand- by the Bank of Tokyo-Mitsubishi UFJ tion. Growing popular are medical, ed. An instrument that triggered the for the year to March 2007. Its prof- cancer and other third-sector insurance

52 JAPAN SPOTLIGHT • January / February 2008 FINANCE

Photo: PANA that conventional insurance firms have been offering. These companies view the giant network as a new promising sales channel and are willing to provide Japan Post Insurance with their products for sale. But they are wary of Japan Post Insurance’s possible introduction of money-making third- sector insurance.

Postal System Bound by Huge Gov’t Bond Holdings

Citizens’ savings collected through post offices throughout Japan have become financial resources for the fiscal investment and loan program (FILP) that is known as the second national budget. Postal savings funds have been lent to public corporations, allowing postwar Japan to develop social infra- structure without depending on over- Cutting the tapes at a ceremony launching the Japan Post Group are (from left) former Internal Affairs & Communications Minister Suga Yoshihide, Financial Services Minister Watanabe Yoshimi, seas funds. At the same time, the large- former Prime Minister Koizumi Junichiro, former Japan Post President Ikuta Masaharu, Japan Post scale financial intermediation depend- Holdings Co. President Nishikawa Yoshifumi, Prime Minister Fukuda Yasuo, and incumbent Internal ing on government guarantees for pub- Affairs & Communications Minister Masuda Hiroya (at Japan Post Holdings Co. in Tokyo’s lic corporations has distorted financial government office area). markets. The fiscal 2001 FILP reform has allowed the postal system to inde- ket. If such sales work to lower bond ple for the postal system that holds a pendently invest postal savings and life prices, however, it may be unfavorable quarter of the people’s deposits,” said insurance funds. Lacking investment for the postal system. Any dynamic Tanaka Naoki, chairman of the Postal know-how, however, the postal system reallocation of portfolio assets is diffi- Services Privatization Committee. “The has had no choice but to concentrate cult. The market is relieved that the postal services privatization is also investment of these funds in safe gov- postal system’s portfolio diversification designed to make Japanese financial ernment bonds. would be very slow.” The two Japan markets internationally assessable.” As a result, Japan Post Bank and Post firms are expected to refrain from The postal services privatization Japan Post Insurance have some ¥200 taking any action that could cause a would allow savings of people to be uti- trillion worth of government bonds. backlash to themselves. lized for invigoration of the economy by They are required to diversify their funneling postal savings and insurance investment portfolios that are now Developing Business Models for funds to the private sector instead of the dominated with government bonds and Survival government sector, including public vulnerable to interest rate hikes. But corporations. As private-sector compa- they have yet to specify how best to do Japan Post Bank and Japan Post nies, the two financial firms of the Japan so. Insurance are the largest lenders for the Post Group would have greater manage- Financial market participants have no government, holding some 30% of out- ment freedom to increase their creativity serious concern about the diversification standing government bonds. Their bal- and efficiency, leading to better and while watching the situation. “We ance sheet realignment may undoubted- more diversified services benefiting cus- expect the diversification to have no ly affect the government’s debt manage- tomers. If these government-set goals serious effect on financial markets,” ment policy. While huge government for postal services privatization were to Nikko Citigroup Ltd. chief strategist bond issues are expected to finance be achieved, the two Japan Post finan- Sano Kazuhiko told the government growing social security expenditures, the cial firms would have to develop busi- Postal Services Privatization Committee Ministry of Finance has been trying ness models for their survival as private- in August 2007. The reason for such hard to sell government bonds to indi- sector companies. They have just expectations is the huge portfolio size. viduals in Japan and to foreign investors launched a struggle to survive. “In a sense that even a small amount of in a bid to get prepared for the two government bond sales by the postal Japan Post firms’ possible shift away system could be taken as heavy selling from government bonds. Sakai Katsuhiko is a senior staff writer and pressure on the bond market, the sys- “Japan had long been unable to brief deputy editor at the Economic News Division, tem has great influences over the mar- foreign countries on the business princi- Jiji Press.

JAPAN SPOTLIGHT • January / February 2008 53