The Japanese Postal Savings System : a State-Run Financial Monster?

Federal Reserve Bank of Cleveland September 26, 1983 decades, sliding to 39 percent of total between government and private finan- dered because such a large source of an active and important role in financial loans outstanding in 1982from 55 per- cial institutions is escalating in such funds is outside the scope of their direct intermediation and credit allocation. By cent in 1960.On the other hand, the fields as shipbuilding and construction control. The extent to which the PSShas collecting personal savings through the ~£QnomicCommentary lending share of government-related of hotels and cement factories. reduced monetary control in Japan is PSSand then allocating them to public financial organizations has increased The government's choice to rely on not clear, however. Although the PSS institutions, the Japanesegovernment steadily. The sustained expansion of administrative control in the allocation maintains a large share of personal has structured an effective system that loans made by the Trust Fund Bureau- of resources proved to be extremely deposits and the percentage of loans functions in concert with its industrial The Japanese Postal Savings System: from 10 percent of the total in 1960to effective during the reconstruction of generated by commercial banks has and social policies. Although unsophis- A State-Run Financial Monster? the current 22.7 percent-has been in- the Japaneseeconomy because of the steadily declined, the PSSchannels the ticated in terms of free-market fluctua- strumental in lowering the banking underdeveloped condition of the capi- vast majority of its funds through tions, this system provided the needed by Laura A. Kuhn industry's share of the lending pie. tal market. Now, as the capital market government agencies. Becausethe MOF capital for postwar economic reconstruc- Since funds garnered in the PSSare matures, and as economic growth slows monitors these agencies (loan rates tion. Now, however, the financial channeled, via the Trust Fund Bureau, and corporate financial demand de- have to be approved by the MOF), the community isconcerned about the power to governmental lending institutions clines, the appropriateness of extensive overall range of monetary and credit that the PSShas amassed and the apan maintains the highest in the past two decades. With a network and hence to private industry, the more governmental influence over the flow control has not been diminished by the encroachment of government institutions personal savings rate of all the of over 22,400branches, the PSShad money post offices absorb and make of funds is being questioned. shift to postal savings-the composition in areas of private-sector finance. The major industrialized countries. In deposits of more than $330 billion in available for lending, the steeper the has merely changed. If, however, the debate centers around the issue of 1982the Japanesepersonal savings 1983:IIQ, making it the largest recipient competition isamong commercial banks. Implications for Monetary Policy PSSfollows through with plans to whether a bureaucracy is better quali- rate was about 19.3 percent of of deposits in the world.' The PSScom- The private financial sector, in effect, The PSSsets interest rates paid on its expand its own lending capacity fied to direct the flow of credit than a disposable income-almost three times petes directly with commercial banks must compete directly with an institu- own deposits independently of the (currently a personal loan of up to private market. Also debated is how that of the United States.' Many analysts for personal deposits, which make up tion whose activities are outside the monetary authorities. The usual resist- about $2,800per borrower is allowed) increased governmental intervention consider the thrift of the Japanese about 99 percent of its deposit base, market economy. Thus, the flow of funds ance of the MPT to cut interest rates on to include housing finance and edu- will affect the efficiency of a free- people to be the primary reason for compared with lessthan 40 percent for is being directed, to a significant extent, postal savings accounts when the BOJ cational loans, the credit it extends will market system. Determining the appro- that country's tremendous industrial commercial banks. An attractive savings by governmental bodies rather than by decides to lower the discount rate be outside the control of the monetary priateness of government vs. private growth and technological advancement source for Japanesehouseholds, the PSS the free market; i.e., the tremendous influences the timing of money market authorities and could weaken the financing is a problem not peculiar to after World War II. Through the postal can provide more favorable rates, growth of postal savings deposits has effects desired by the BOJ. When de- effectiveness of monetary policy. the Japanesesituation. Indeed, savings system (PSS),the Japanesegov- terms, and tax treatment than commer- created a substantial flow of credit from clines of interest rates on postal American policymakers are now raising ernment has converted personal savings cial banks. Consequently, the financial the private to the public sector, bypass- deposits lag behind those of private Conclusion similar issuesabout the development of deposits into long-term capital for community is concerned about the ing the market mechanism. A question of financial institutions, a shift of funds The Japanesegovernment has played a national industrial policy. industrial, trade, infrastructural, and unrestricted expansion of post office efficiency and equity then arisesconcern- to the PSSoften results, reducing the social development. The state-run PSS savings, which are viewed as a serious ing the appropriate allocation of funds share of funds made available through has played a vital role in channeling threat to the commercial banking in the nation's economy as a whole. private sources, particularly smaller Federal Reserve Bank of Cleveland BULK RATE assetsto the private sector and in industry. This Economic Commentary Major portions of the funds channeled banks and thrift institutions. In July 1972 Research Department U.S. Postage Paid helping to finance the huge govern- discussesJapan's postal savings system, through government financial institu- and in May 1977,for example, when P.O. Box 6387 Cleveland, OH ment deficits. its characteristics and problems, and its tions via the Treasury Investments and interest-rate declines in PSSaccounts Cleveland, OH 44101 Permit No, 385 Post office savings have mushroomed effect on the Japaneseeconomy.

Loans program went into housing (26.2 lagged behind the reductions in pri- 1. For additional information on the savings percent in FY 1981), small enterprise vate-sector deposits by 15 days, the total rate, see Organization for Economic Cooperation The Japanese Financial System promotion (19.6percent), living environ- value of postal savings, as a proportion and Development, OECD Economic Outlook, In contrast to the U.S.financial ment (13.9 percent), and transportation of all fixed deposits, increased July 1983. system, the Japanesefinancial market Although the observed frugality in household and communication (10.1 percentj.? substantially. For the same reason, savings results from many factors, much can be structure is highly specialized. The These sectors often find it difficult to during July-September 1980,the explained by the rapid growth in income and by system shows extensive separation of attract capital without paying a premi- accounts of the Treasury moved into a institutional factors, such as the wage payment financial activities, a comparatively high um. Moreover, the social and economic sizable surplus, the counterpart of system, the underdeveloped condition of the degree of regulation and control of social security system, the limited availability of benefits derived from public interven- which was a record shortage of funds in consumer and housing credit, and the tax system. private financial institutions by the tion may justify the intervention itself. the money markets." See Henry C. and Mable I. Wallich, "Banking and monetary authorities, and a much more Intertwined with criticism over the The MOF and the BOJ are advocating Finance," in Hugh Patrick and Henry Rosovsky, active governmental role in financial Eds., Asia's New Giant, Brookings Institution handling of postal savings is the issue of unification of the present two-tier (Washington: 1976), pp. 249-315. the government's "crowding out" the decision making process on interest 2. The deposits of the PSS are about three times private sector by encroaching on areas rates, claiming that the effective Laura A. Kuhn, a research assistant with the those of the outstanding accounts of Banque operation of monetary policy is hin- Federal Reserve Bank of Cleveland, studied in Nationale de Paris (the world's largest bank in of private financing. Competition japan in 1982. terms of deposits) and about five times those of The views stated herein are those of the author Japan's largest bank. See Gordon F. Boreharn, 5. See "Highlight of FY1981 Budget Treasury 6. "Trends in Personal Savings and Personal and not necessarily those of the Federal Reserve "The Financial System: One Reason for Japan's Investments and loans Program," japan Financial Assets Selection," Bank of Japan, Special Address Correction Requested: Pleasesend corrected mailing label to the Federal Bank of Cleveland or of the Board of Governors Success," Canadian Banker and fCB Review, vol. Economic journal, January 13, 1981, p. 15. Paper #93 (April 1981), pp. 15-16. ReserveBankof Cleveland, ResearchDepartment, P.O. Box6387,Cleveland, OH 44101. of the Federal Reserve System. 88, no. 6 (December 1981), pp. 12-17. trillion yen by 1975-a growth of 9 times lion yen in this type of account. intermediation and credit allocation.' mined independently by a committee Flow of Personal Savings through the Postal Savings System The main overseer of almost all aspects of the MPT. in 10 years. The growth of postal savings The absence of required formal of the Japanese financial system is the The government plays a direct and Treasury Investments Personal deposits has been particularly steep in reporting of PSSaccounts has led to Ministry of Finance (MOF). The MOF is active role in financial intermediation and Loans budget I savings I recent years, soaring to over 80 trillion widespread abuse of tax-exemption the powerful budget-making agency and credit allocation. These functions appropriation for yen in August 1983. The PSShas captured privileges. With little difficulty, a an increasingly larger share of personal individuals can open multiple accounts with many responsibilities, including are central to the implementation of FY 1982 j billions of Postal savings Pension savings, while the share of commercial in excess of the legal limit. In 1980 the financial management policy of the Japan's industrial and social policies. dollars @ 249.5 yen system funds banks and savings institutions has de- PSSmaintained a phenomenal 310 mil- central government. The only exception Funds are channeled through a group per dollar I I I I to the MOF's domain is the PSS,which of government-owned banks and finance clined steadily since the mid-1960s. PSS lion accounts-more than two and one- is under the authority of the Ministry of corporations to promote and develop I deposits now total more than five times half times the total Japanese popula- Posts and Telecommunications (MPT). key industries, foreign trade, small- and Trust Fund Bureau •• the deposits of Japan's largest tion.! Unfortunately, tax evasion is The central bank, the Bank of Japan medium-sized enterprises, agriculture, J commercial bank. relatively easy and fairly common, much (BOj), works in concert with but under housing, and social infrastructure. The There are several reasons for the to the dismay of the government whose h rapid growth of postal savings and in- budget deficit amounted to $44 billion guidelines set by the MOF in determin- Japanese public is a major supplier of Postal life Insurance ~ Treasury Investments Government I dividuals' increasing preference for this last year. In contrast, savers at private ing and implementing national mone- funds (savings) to these institutions, the and Annuity Fund and loans bonds tary policies. The major instruments of primary intermediary being the PSS. I I system over other financial institutions. financial institutions must file a return monetary policy available to the BOJ Post office savings, which now With more than twice as many branches to receive tax exemptions, making it are similar to tools used by the Federal account for about 30 percent of the (I as all commercial banking institutions fairly easy to monitor these accounts. entire personal savings of Japan, are 2J~ I combined, the PSSis very accessible to Bank deposits are cross-checked to en- Reserve System. Bank credit replaces a Public Public local Finance large portion of equity capital in Japan, turned over to the Trust Fund Bureau depositors, even in remote parts of the sure that the 35 percent withholding tax enterprise corporations governments corporations i.e., many Japanese firms are very highly (TFB) of the Ministry of Finance. The I I I country. In addition to installing cash on interest is deducted from any pro- leveraged, depending heavily on bank TFB channels the money, along with I I I I dispensers at the major post offices, the ceeds over the tax-exempt limit. PSSrecently implemented an on-line com- Interest-rate advantages. Another credit rather than on forms of internal pension-fund payments, into areas Japan National local governments ...... 13.231 Railways ...... 4.25 finance. Thus, the monetary authorities specified for development (see figure). Special accounts ...... 1.64 puterized network that enables deposi- issue in the postal savings controversy is rely heavily on credit controls (particu- The TFB receives slightly more than Nippon Telegraph & tors to withdraw or deposit at anyone the dual system by which interest rates larly ceilings on central bank credit to one-half of its financial resources from Telephone Public Corp ...... 0.60 of a myriad of nationwide branches. are set. Postal savings rates are decided private banks) and "window guidance" post office savings and is the main sup- Japan Development Bank ...... 3.20 The PSShas mustered a strong political by a special committee of the MPT, Hokkaido & Tohoku Develop- (the nature and levels of bank lending plier of funds for the Treasury Invest- Housing & Urban Development backing within local governments and while a committee of the finance ment Corporation ...... 0.24 being directed by the BOJ according to rnents and Loans program. Under this Corporation ...... 2.91 in the Diet (parliament). This political ministry and the central bank set mar- Export-Import Bank of Japan ... 3.58 national economic and industrial poli- program, which is determined each year Pension Welfare Service strength has aided in the passage of ket and bank account rates. Because the Corporation ...... 3.04 Small Business Finance cies). Rather than change reserve ratios along with the national budget, funds Corporation ...... 6.17 favorable legislation, the most impor- PSSis not under the jurisdiction of the Japan Highway Corp ...... 3.48 or perform open-market operations, are allocated to various government- People's Finance Corpor- tant elements of which are preferential monetary authorities, PSSdeposits gen- the BOJ influences financial markets affiliated agencies. In the 1950sand , Japan Railway Construction ation ...... 7.73 rates, terms, and tax treatment. The erally earn higher rates of interest than Corporation ...... 0.46 primarily by changing its credit and 1960s,funds from Treasury Investments Shoko Chukin Bank ...... 0.29 private banking industry views these bank deposits. , Overseas Economic Housing loan Corpora- discount policies. and Loans were used primarily for Cooperation Fund ...... 0.83 advantages as grossly unfair, consid- tion ...... 13.61 To meet the high credit demands of large-scale industrial projects, foreign- Others ...... 2.63 ering the PSSto be a "state-run lending and Agriculture, Forestry, Japanese firms, commercial banks bor- trade finance, and promotion of small- & Fishery Finance Corp ...... 2.28 financial monster." the Allocation of Capital row heavily from the BOJ through its and medium-sized enterprises. The focus Medical Care Facilities Preferential tax treatment. In The disparity of interest rates in favor discount window. The BOJ discount rate of the program shifted in the 1970sto Finance Corporation ...... 0.40 contrast to the United States, where tax of the PSSand the security and flex- is the foundation of the interest-rate mortgage financing and social develop- a. Figures exclude government guaranteed bonds Environmental Sanitation Busi- preference primarily is given to ibility provided by its accounts have structure of the entire financial system. ment, reflecting the maturation of the and borrowing. ness Finance Corportion ...... 1.07 consumption (or borrowing), the Jap- steadily drained funds from private industrial structure and the real need SOURCE: Bank of Japan, Economic Statistics Annual 1982, Okinawa Development anese government promotes saving and commercial banks. Post office savings Short-term interest rates, along with the March 1983. Finance Corporation ...... 0.46 lending rates of private financial institu- for social infrastructure investment. The grants special tax exemptions to encour- are now posing a threat to commercial tions, generally move by the same margin current phase emphasizes energy re- age personal savings. Under the current banks, not only in the accumulation of as the change in the discount rate. sources and technology as well. Last one-fourth of the total government lead to an expansion in the fiscal deficit. Japanese tax system, an individual is deposits but also in lending to both Interest rates on postal savings deposits year Treasury Investments and Loans bonds outstanding, the TFB serves as an exempt from taxes on interest income private industry and individuals. The are again the exception, being deter- channeled more than $72 billion into outlet for bonds that the central bank Reasons for Growth from bank deposits and bonds with a prin- lending share of commercial banks has purchases in the secondary market. The The PSShas become highly contro- cipal balance of up to 3 million yen declined consistently in the past two 3. For an overview of Japan's financial system government-lending institutions, and and a description of the current liberalization appropriation requests for FY 1983 rose underwriting of government bonds is, versial, primarily because the size of its (about $13,000) and on the interest in- 4. Of the total postal savings accounts, 240 process, see Charles Pigott, "Financial Reform in to a high of $86 billion. however, one of the more controversial financial base has grown at such an aston- co~e from an additional 3 million yen million were time deposits (about 80 percent of Japan," in Financial Development and Reform in Postal savings funds also are used, via uses of postal savings proceeds. Making ishing rate over the past 20 years. In the in post-office accounts. Interest on post- the total) and 70 million were ordinary deposits. the Pacific Basin, Federal Reserve Bank of San See Masahiko ishizuka, "Juggernaut in Domestic Francisco, Economic Review, no. 1 (Winter 1983), the TFB, to finance part of the govern- it easier for the government to maintain mid-1960s, PSSdeposits topped the 2 al savings is always tax free, but an Financial Scene?," Japan Economic Journa/, pp.25-46. ment's budget deficit. Absorbing almost expenditures in excess of revenues may trillion yen level, swelling to over 24 individual can hold no more than 3 mil- October 7, 1980. trillion yen by 1975-a growth of 9 times lion yen in this type of account. intermediation and credit allocation.' mined independently by a committee Flow of Personal Savings through the Postal Savings System The main overseer of almost all aspects of the MPT. in 10 years. The growth of postal savings The absence of required formal of the Japanese financial system is the The government plays a direct and Treasury Investments Personal deposits has been particularly steep in reporting of PSSaccounts has led to Ministry of Finance (MOF). The MOF is active role in financial intermediation and Loans budget I savings I recent years, soaring to over 80 trillion widespread abuse of tax-exemption the powerful budget-making agency and credit allocation. These functions appropriation for yen in August 1983. The PSShas captured privileges. With little difficulty, a an increasingly larger share of personal individuals can open multiple accounts with many responsibilities, including are central to the implementation of FY 1982 j billions of Postal savings Pension savings, while the share of commercial in excess of the legal limit. In 1980 the financial management policy of the Japan's industrial and social policies. dollars @ 249.5 yen system funds banks and savings institutions has de- PSSmaintained a phenomenal 310 mil- central government. The only exception Funds are channeled through a group per dollar I I I I to the MOF's domain is the PSS,which of government-owned banks and finance clined steadily since the mid-1960s. PSS lion accounts-more than two and one- is under the authority of the Ministry of corporations to promote and develop I deposits now total more than five times half times the total Japanese popula- Posts and Telecommunications (MPT). key industries, foreign trade, small- and Trust Fund Bureau •• the deposits of Japan's largest tion.! Unfortunately, tax evasion is The central bank, the Bank of Japan medium-sized enterprises, agriculture, J commercial bank. relatively easy and fairly common, much (BOj), works in concert with but under housing, and social infrastructure. The There are several reasons for the to the dismay of the government whose h rapid growth of postal savings and in- budget deficit amounted to $44 billion guidelines set by the MOF in determin- Japanese public is a major supplier of Postal life Insurance ~ Treasury Investments Government I dividuals' increasing preference for this last year. In contrast, savers at private ing and implementing national mone- funds (savings) to these institutions, the and Annuity Fund and loans bonds tary policies. The major instruments of primary intermediary being the PSS. I I system over other financial institutions. financial institutions must file a return monetary policy available to the BOJ Post office savings, which now With more than twice as many branches to receive tax exemptions, making it are similar to tools used by the Federal account for about 30 percent of the (I as all commercial banking institutions fairly easy to monitor these accounts. entire personal savings of Japan, are 2J~ I combined, the PSSis very accessible to Bank deposits are cross-checked to en- Reserve System. Bank credit replaces a Public Public local Finance large portion of equity capital in Japan, turned over to the Trust Fund Bureau depositors, even in remote parts of the sure that the 35 percent withholding tax enterprise corporations governments corporations i.e., many Japanese firms are very highly (TFB) of the Ministry of Finance. The I I I country. In addition to installing cash on interest is deducted from any pro- leveraged, depending heavily on bank TFB channels the money, along with I I I I dispensers at the major post offices, the ceeds over the tax-exempt limit. PSSrecently implemented an on-line com- Interest-rate advantages. Another credit rather than on forms of internal pension-fund payments, into areas Japan National local governments ...... 13.231 Railways ...... 4.25 finance. Thus, the monetary authorities specified for development (see figure). Special accounts ...... 1.64 puterized network that enables deposi- issue in the postal savings controversy is rely heavily on credit controls (particu- The TFB receives slightly more than Nippon Telegraph & tors to withdraw or deposit at anyone the dual system by which interest rates larly ceilings on central bank credit to one-half of its financial resources from Telephone Public Corp ...... 0.60 of a myriad of nationwide branches. are set. Postal savings rates are decided private banks) and "window guidance" post office savings and is the main sup- Japan Development Bank ...... 3.20 The PSShas mustered a strong political by a special committee of the MPT, Hokkaido & Tohoku Develop- (the nature and levels of bank lending plier of funds for the Treasury Invest- Housing & Urban Development backing within local governments and while a committee of the finance ment Corporation ...... 0.24 being directed by the BOJ according to rnents and Loans program. Under this Corporation ...... 2.91 in the Diet (parliament). This political ministry and the central bank set mar- Export-Import Bank of Japan ... 3.58 national economic and industrial poli- program, which is determined each year Pension Welfare Service strength has aided in the passage of ket and bank account rates. Because the Corporation ...... 3.04 Small Business Finance cies). Rather than change reserve ratios along with the national budget, funds Corporation ...... 6.17 favorable legislation, the most impor- PSSis not under the jurisdiction of the Japan Highway Corp ...... 3.48 or perform open-market operations, are allocated to various government- People's Finance Corpor- tant elements of which are preferential monetary authorities, PSSdeposits gen- the BOJ influences financial markets affiliated agencies. In the 1950sand , Japan Railway Construction ation ...... 7.73 rates, terms, and tax treatment. The erally earn higher rates of interest than Corporation ...... 0.46 primarily by changing its credit and 1960s,funds from Treasury Investments Shoko Chukin Bank ...... 0.29 private banking industry views these bank deposits. , Overseas Economic Housing loan Corpora- discount policies. and Loans were used primarily for Cooperation Fund ...... 0.83 advantages as grossly unfair, consid- tion ...... 13.61 To meet the high credit demands of large-scale industrial projects, foreign- Others ...... 2.63 ering the PSSto be a "state-run lending and Agriculture, Forestry, Japanese firms, commercial banks bor- trade finance, and promotion of small- & Fishery Finance Corp ...... 2.28 financial monster." the Allocation of Capital row heavily from the BOJ through its and medium-sized enterprises. The focus Medical Care Facilities Preferential tax treatment. In The disparity of interest rates in favor discount window. The BOJ discount rate of the program shifted in the 1970sto Finance Corporation ...... 0.40 contrast to the United States, where tax of the PSSand the security and flex- is the foundation of the interest-rate mortgage financing and social develop- a. Figures exclude government guaranteed bonds Environmental Sanitation Busi- preference primarily is given to ibility provided by its accounts have structure of the entire financial system. ment, reflecting the maturation of the and borrowing. ness Finance Corportion ...... 1.07 consumption (or borrowing), the Jap- steadily drained funds from private industrial structure and the real need SOURCE: Bank of Japan, Economic Statistics Annual 1982, Okinawa Development anese government promotes saving and commercial banks. Post office savings Short-term interest rates, along with the March 1983. Finance Corporation ...... 0.46 lending rates of private financial institu- for social infrastructure investment. The grants special tax exemptions to encour- are now posing a threat to commercial tions, generally move by the same margin current phase emphasizes energy re- age personal savings. Under the current banks, not only in the accumulation of as the change in the discount rate. sources and technology as well. Last one-fourth of the total government lead to an expansion in the fiscal deficit. Japanese tax system, an individual is deposits but also in lending to both Interest rates on postal savings deposits year Treasury Investments and Loans bonds outstanding, the TFB serves as an exempt from taxes on interest income private industry and individuals. The are again the exception, being deter- channeled more than $72 billion into outlet for bonds that the central bank Reasons for Growth from bank deposits and bonds with a prin- lending share of commercial banks has purchases in the secondary market. The The PSShas become highly contro- cipal balance of up to 3 million yen declined consistently in the past two 3. For an overview of Japan's financial system government-lending institutions, and and a description of the current liberalization appropriation requests for FY 1983 rose underwriting of government bonds is, versial, primarily because the size of its (about $13,000) and on the interest in- 4. Of the total postal savings accounts, 240 process, see Charles Pigott, "Financial Reform in to a high of $86 billion. however, one of the more controversial financial base has grown at such an aston- co~e from an additional 3 million yen million were time deposits (about 80 percent of Japan," in Financial Development and Reform in Postal savings funds also are used, via uses of postal savings proceeds. Making ishing rate over the past 20 years. In the in post-office accounts. Interest on post- the total) and 70 million were ordinary deposits. the Pacific Basin, Federal Reserve Bank of San See Masahiko ishizuka, "Juggernaut in Domestic Francisco, Economic Review, no. 1 (Winter 1983), the TFB, to finance part of the govern- it easier for the government to maintain mid-1960s, PSSdeposits topped the 2 al savings is always tax free, but an Financial Scene?," Japan Economic Journa/, pp.25-46. ment's budget deficit. Absorbing almost expenditures in excess of revenues may trillion yen level, swelling to over 24 individual can hold no more than 3 mil- October 7, 1980. trillion yen by 1975-a growth of 9 times lion yen in this type of account. intermediation and credit allocation.' mined independently by a committee Flow of Personal Savings through the Postal Savings System The main overseer of almost all aspects of the MPT. in 10 years. The growth of postal savings The absence of required formal of the Japanese financial system is the The government plays a direct and Treasury Investments Personal deposits has been particularly steep in reporting of PSSaccounts has led to Ministry of Finance (MOF). The MOF is active role in financial intermediation and Loans budget I savings I recent years, soaring to over 80 trillion widespread abuse of tax-exemption the powerful budget-making agency and credit allocation. These functions appropriation for yen in August 1983. The PSShas captured privileges. With little difficulty, a an increasingly larger share of personal individuals can open multiple accounts with many responsibilities, including are central to the implementation of FY 1982 j billions of Postal savings Pension savings, while the share of commercial in excess of the legal limit. In 1980 the financial management policy of the Japan's industrial and social policies. dollars @ 249.5 yen system funds banks and savings institutions has de- PSSmaintained a phenomenal 310 mil- central government. The only exception Funds are channeled through a group per dollar I I I I to the MOF's domain is the PSS,which of government-owned banks and finance clined steadily since the mid-1960s. PSS lion accounts-more than two and one- is under the authority of the Ministry of corporations to promote and develop I deposits now total more than five times half times the total Japanese popula- Posts and Telecommunications (MPT). key industries, foreign trade, small- and Trust Fund Bureau •• the deposits of Japan's largest tion.! Unfortunately, tax evasion is The central bank, the Bank of Japan medium-sized enterprises, agriculture, J commercial bank. relatively easy and fairly common, much (BOj), works in concert with but under housing, and social infrastructure. The There are several reasons for the to the dismay of the government whose h rapid growth of postal savings and in- budget deficit amounted to $44 billion guidelines set by the MOF in determin- Japanese public is a major supplier of Postal life Insurance ~ Treasury Investments Government I dividuals' increasing preference for this last year. In contrast, savers at private ing and implementing national mone- funds (savings) to these institutions, the and Annuity Fund and loans bonds tary policies. The major instruments of primary intermediary being the PSS. I I system over other financial institutions. financial institutions must file a return monetary policy available to the BOJ Post office savings, which now With more than twice as many branches to receive tax exemptions, making it are similar to tools used by the Federal account for about 30 percent of the (I as all commercial banking institutions fairly easy to monitor these accounts. entire personal savings of Japan, are 2J~ I combined, the PSSis very accessible to Bank deposits are cross-checked to en- Reserve System. Bank credit replaces a Public Public local Finance large portion of equity capital in Japan, turned over to the Trust Fund Bureau depositors, even in remote parts of the sure that the 35 percent withholding tax enterprise corporations governments corporations i.e., many Japanese firms are very highly (TFB) of the Ministry of Finance. The I I I country. In addition to installing cash on interest is deducted from any pro- leveraged, depending heavily on bank TFB channels the money, along with I I I I dispensers at the major post offices, the ceeds over the tax-exempt limit. PSSrecently implemented an on-line com- Interest-rate advantages. Another credit rather than on forms of internal pension-fund payments, into areas Japan National local governments ...... 13.231 Railways ...... 4.25 finance. Thus, the monetary authorities specified for development (see figure). Special accounts ...... 1.64 puterized network that enables deposi- issue in the postal savings controversy is rely heavily on credit controls (particu- The TFB receives slightly more than Nippon Telegraph & tors to withdraw or deposit at anyone the dual system by which interest rates larly ceilings on central bank credit to one-half of its financial resources from Telephone Public Corp ...... 0.60 of a myriad of nationwide branches. are set. Postal savings rates are decided private banks) and "window guidance" post office savings and is the main sup- Japan Development Bank ...... 3.20 The PSShas mustered a strong political by a special committee of the MPT, Hokkaido & Tohoku Develop- (the nature and levels of bank lending plier of funds for the Treasury Invest- Housing & Urban Development backing within local governments and while a committee of the finance ment Corporation ...... 0.24 being directed by the BOJ according to rnents and Loans program. Under this Corporation ...... 2.91 in the Diet (parliament). This political ministry and the central bank set mar- Export-Import Bank of Japan ... 3.58 national economic and industrial poli- program, which is determined each year Pension Welfare Service strength has aided in the passage of ket and bank account rates. Because the Corporation ...... 3.04 Small Business Finance cies). Rather than change reserve ratios along with the national budget, funds Corporation ...... 6.17 favorable legislation, the most impor- PSSis not under the jurisdiction of the Japan Highway Corp ...... 3.48 or perform open-market operations, are allocated to various government- People's Finance Corpor- tant elements of which are preferential monetary authorities, PSSdeposits gen- the BOJ influences financial markets affiliated agencies. In the 1950sand , Japan Railway Construction ation ...... 7.73 rates, terms, and tax treatment. The erally earn higher rates of interest than Corporation ...... 0.46 primarily by changing its credit and 1960s,funds from Treasury Investments Shoko Chukin Bank ...... 0.29 private banking industry views these bank deposits. , Overseas Economic Housing loan Corpora- discount policies. and Loans were used primarily for Cooperation Fund ...... 0.83 advantages as grossly unfair, consid- tion ...... 13.61 To meet the high credit demands of large-scale industrial projects, foreign- Others ...... 2.63 ering the PSSto be a "state-run lending and Agriculture, Forestry, Japanese firms, commercial banks bor- trade finance, and promotion of small- & Fishery Finance Corp ...... 2.28 financial monster." the Allocation of Capital row heavily from the BOJ through its and medium-sized enterprises. The focus Medical Care Facilities Preferential tax treatment. In The disparity of interest rates in favor discount window. The BOJ discount rate of the program shifted in the 1970sto Finance Corporation ...... 0.40 contrast to the United States, where tax of the PSSand the security and flex- is the foundation of the interest-rate mortgage financing and social develop- a. Figures exclude government guaranteed bonds Environmental Sanitation Busi- preference primarily is given to ibility provided by its accounts have structure of the entire financial system. ment, reflecting the maturation of the and borrowing. ness Finance Corportion ...... 1.07 consumption (or borrowing), the Jap- steadily drained funds from private industrial structure and the real need SOURCE: Bank of Japan, Economic Statistics Annual 1982, Okinawa Development anese government promotes saving and commercial banks. Post office savings Short-term interest rates, along with the March 1983. Finance Corporation ...... 0.46 lending rates of private financial institu- for social infrastructure investment. The grants special tax exemptions to encour- are now posing a threat to commercial tions, generally move by the same margin current phase emphasizes energy re- age personal savings. Under the current banks, not only in the accumulation of as the change in the discount rate. sources and technology as well. Last one-fourth of the total government lead to an expansion in the fiscal deficit. Japanese tax system, an individual is deposits but also in lending to both Interest rates on postal savings deposits year Treasury Investments and Loans bonds outstanding, the TFB serves as an exempt from taxes on interest income private industry and individuals. The are again the exception, being deter- channeled more than $72 billion into outlet for bonds that the central bank Reasons for Growth from bank deposits and bonds with a prin- lending share of commercial banks has purchases in the secondary market. The The PSShas become highly contro- cipal balance of up to 3 million yen declined consistently in the past two 3. For an overview of Japan's financial system government-lending institutions, and and a description of the current liberalization appropriation requests for FY 1983 rose underwriting of government bonds is, versial, primarily because the size of its (about $13,000) and on the interest in- 4. Of the total postal savings accounts, 240 process, see Charles Pigott, "Financial Reform in to a high of $86 billion. however, one of the more controversial financial base has grown at such an aston- co~e from an additional 3 million yen million were time deposits (about 80 percent of Japan," in Financial Development and Reform in Postal savings funds also are used, via uses of postal savings proceeds. Making ishing rate over the past 20 years. In the in post-office accounts. Interest on post- the total) and 70 million were ordinary deposits. the Pacific Basin, Federal Reserve Bank of San See Masahiko ishizuka, "Juggernaut in Domestic Francisco, Economic Review, no. 1 (Winter 1983), the TFB, to finance part of the govern- it easier for the government to maintain mid-1960s, PSSdeposits topped the 2 al savings is always tax free, but an Financial Scene?," Japan Economic Journa/, pp.25-46. ment's budget deficit. Absorbing almost expenditures in excess of revenues may trillion yen level, swelling to over 24 individual can hold no more than 3 mil- October 7, 1980. Federal Reserve Bank of Cleveland September 26, 1983 decades, sliding to 39 percent of total between government and private finan- dered because such a large source of an active and important role in financial loans outstanding in 1982from 55 per- cial institutions is escalating in such funds is outside the scope of their direct intermediation and credit allocation. By cent in 1960.On the other hand, the fields as shipbuilding and construction control. The extent to which the PSShas collecting personal savings through the ~£QnomicCommentary lending share of government-related of hotels and cement factories. reduced monetary control in Japan is PSSand then allocating them to public financial organizations has increased The government's choice to rely on not clear, however. Although the PSS institutions, the Japanesegovernment steadily. The sustained expansion of administrative control in the allocation maintains a large share of personal has structured an effective system that loans made by the Trust Fund Bureau- of resources proved to be extremely deposits and the percentage of loans functions in concert with its industrial The Japanese Postal Savings System: from 10 percent of the total in 1960to effective during the reconstruction of generated by commercial banks has and social policies. Although unsophis- A State-Run Financial Monster? the current 22.7 percent-has been in- the Japaneseeconomy because of the steadily declined, the PSSchannels the ticated in terms of free-market fluctua- strumental in lowering the banking underdeveloped condition of the capi- vast majority of its funds through tions, this system provided the needed by Laura A. Kuhn industry's share of the lending pie. tal market. Now, as the capital market government agencies. Becausethe MOF capital for postwar economic reconstruc- Since funds garnered in the PSSare matures, and as economic growth slows monitors these agencies (loan rates tion. Now, however, the financial channeled, via the Trust Fund Bureau, and corporate financial demand de- have to be approved by the MOF), the community isconcerned about the power to governmental lending institutions clines, the appropriateness of extensive overall range of monetary and credit that the PSShas amassed and the apan maintains the highest in the past two decades. With a network and hence to private industry, the more governmental influence over the flow control has not been diminished by the encroachment of government institutions personal savings rate of all the of over 22,400branches, the PSShad money post offices absorb and make of funds is being questioned. shift to postal savings-the composition in areas of private-sector finance. The major industrialized countries. In deposits of more than $330 billion in available for lending, the steeper the has merely changed. If, however, the debate centers around the issue of 1982the Japanesepersonal savings 1983:IIQ, making it the largest recipient competition isamong commercial banks. Implications for Monetary Policy PSSfollows through with plans to whether a bureaucracy is better quali- rate was about 19.3 percent of of deposits in the world.' The PSScom- The private financial sector, in effect, The PSSsets interest rates paid on its expand its own lending capacity fied to direct the flow of credit than a disposable income-almost three times petes directly with commercial banks must compete directly with an institu- own deposits independently of the (currently a personal loan of up to private market. Also debated is how that of the United States.' Many analysts for personal deposits, which make up tion whose activities are outside the monetary authorities. The usual resist- about $2,800per borrower is allowed) increased governmental intervention consider the thrift of the Japanese about 99 percent of its deposit base, market economy. Thus, the flow of funds ance of the MPT to cut interest rates on to include housing finance and edu- will affect the efficiency of a free- people to be the primary reason for compared with lessthan 40 percent for is being directed, to a significant extent, postal savings accounts when the BOJ cational loans, the credit it extends will market system. Determining the appro- that country's tremendous industrial commercial banks. An attractive savings by governmental bodies rather than by decides to lower the discount rate be outside the control of the monetary priateness of government vs. private growth and technological advancement source for Japanesehouseholds, the PSS the free market; i.e., the tremendous influences the timing of money market authorities and could weaken the financing is a problem not peculiar to after World War II. Through the postal can provide more favorable rates, growth of postal savings deposits has effects desired by the BOJ. When de- effectiveness of monetary policy. the Japanesesituation. Indeed, savings system (PSS),the Japanesegov- terms, and tax treatment than commer- created a substantial flow of credit from clines of interest rates on postal American policymakers are now raising ernment has converted personal savings cial banks. Consequently, the financial the private to the public sector, bypass- deposits lag behind those of private Conclusion similar issuesabout the development of deposits into long-term capital for community is concerned about the ing the market mechanism. A question of financial institutions, a shift of funds The Japanesegovernment has played a national industrial policy. industrial, trade, infrastructural, and unrestricted expansion of post office efficiency and equity then arisesconcern- to the PSSoften results, reducing the social development. The state-run PSS savings, which are viewed as a serious ing the appropriate allocation of funds share of funds made available through has played a vital role in channeling threat to the commercial banking in the nation's economy as a whole. private sources, particularly smaller Federal Reserve Bank of Cleveland BULK RATE assetsto the private sector and in industry. This Economic Commentary Major portions of the funds channeled banks and thrift institutions. In July 1972 Research Department U.S. Postage Paid helping to finance the huge govern- discussesJapan's postal savings system, through government financial institu- and in May 1977,for example, when P.O. Box 6387 Cleveland, OH ment deficits. its characteristics and problems, and its tions via the Treasury Investments and interest-rate declines in PSSaccounts Cleveland, OH 44101 Permit No, 385 Post office savings have mushroomed effect on the Japaneseeconomy.