PUBLIC FINANCE AND INVESTMENT OUT OF THE JAPANESE POST OFFICE - A HISTORY OF THE POSTAL SAVINGS SYSTEM by MATTHEW SPOONER B.A., University of Calgary, 2002 A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF ARTS, ASIA PACIFIC POLICY STUDIES in THE FACULTY OF GRADUATE STUDIES (Institute of Asian Research) We accept this thesis as conforming to the required standard THE UNIVERSITY OF BRITISH COLUMBIA April 2004 © Matthew Spooner, 2004 Library Authorization In presenting this thesis in partial fulfillment of the requirements for an advanced degree at the University of British Columbia, I agree that the Library shall make it freely available for reference and study. I further agree that permission for extensive copying of this thesis for scholarly purposes may be granted by the head of my department or by his or her representatives. It is understood that copying or publication of this thesis for financial gain shall not be allowed without my written permission. Name of Author (please print) Date (dd/mm/yyyy) Title of Thesis: p^lic f, JdipAAeicI Post 0 f -f', c<e A H^it^ry c'f Ik*. Pe±1*{ S**>~£S 3 y> irt yyy De9ree: M.h.y As-*. P*c\fi<Lp*t;iy M^.^s, Y^r: lOOH Department of /^-f.Tufc P-f /Ajx'a* Res<iar-ck The University of British Columbia Vancouver, BC Canada ABSTRACT The historical development of the Postal Savings System (PSS) can be viewed as serving two functions in the Japanese economy. First, the PSS has served as a savings regime for Japanese households since postal savings were established in 1875. The other function concerns the investment of postal funds collected by the network of post offices across Japan. In view of the relationship between the savings and investment functions, the political and economic implications of postal banking are highlighted by its institutional arrangements with public finance and investment. In the post-World War II period, Tanaka Kakuei seized the opportunity to safeguard and strengthen the affairs of the PSS. The realignment of political factions and consolidation of financial policy undertaken by Tanaka between the 1950s and 1980s brought to the forefront the compounding political and economic benefits and impending costs arising from postal banking in Japan. This characterized the political landscape of Japan for the next thirty years. Tanaka utilized the might of his political faction within the Liberal Democratic Party and a postal affairs interest group to effectively promote and safeguard the PSS and the Fiscal Investment Loan Program (FILP) budget. The innovations of Tanaka Kakuei are presented as the primary reasons for continued opposition to reform the Postal Savings System. The analytical framework presented in this paper is consistent with the historical development of the Japanese political economy. TABLE OF CONTENTS Abstract ii Table of Contents iii List of Tables vii List of Figures viii List of Acronyms ix Acknowledgements xi Introduction • 1 Chapter I Establishment and Development of the Postal Savings System (PSS): 1875-1953 5 1.1 Introduction 5 1.2 Inception of the PSS 6 1.3 Historical Context 8 1.4 Growth and Ministerial Authority 13 1.4.1 The Emergence of Inter-Ministerial Rivalries 17 1.5 Reversion Back to Maeshima's Vision 19 1.6 Rise of Special Government Banks 21 1.7 The MOF's Deposits Bureau (Yokinbu): Investment in Special Government Banks and Companies 22 1.8 Terauchi Scandal implicating the Deposits Bureau 26 1.9 Deficit Financing out of Postal Savings 30 1.10 Postal Life Insurance and Postal Pension Plan 31 1.11 Prioritization of Public Savings under Military Leadership 32 1.12 Rebirth of Public Finance and Investment out of the Post Office 36 1.13 Conclusion 38 Chapter II Establishment of the Fiscal Investment Loan Program and Tanaka Kakuei's Entrenchment of Political and Economic Benefits of the PSS: 1953-1973 41 2.1 Introduction 41 2.2 Debate over Administrative Control of Postal Funds 42 2.3 Tanaka Kakuei and his Etsuzankai 46 2.4 Informal Politics through the Commissioned Post Office 49 2.5 The Postal Affairs Group (Yuseizoku 52 2.6 Direction of FILP Investments: 1953-1974 53 - Infrastructure Investment: 1953-1963 53 - Industrial Promotion: 1953-1963 55 2.6.1 Maturity of Investment from 1964 to 1974 56 2.7 Full Review and Approval of the FILP by the Diet '. 58 2.8 Conclusion 59 Chapter III Tanaka's Realignment of Political Power and his Faction's Defense of Postal Banking: 1973-2004 62 3.1 Introduction 62 V 3.2 Tanaka Kakuei and a New Era of Fiscal Investment: A New Direction for the PS Sand FILP . 63 3.3 Maintenance of Tanaka's Influence 68 3.4 Advantages of the Postal Savings over Private Banks 72 - Maruyu Tax Exemption System and the Green Card Identification Card System. 72 3.4.1 Attacks on Postal Savings Interest Rate Advantage 76 3.5 Predominance of Tanaka's Political Faction 81 3.6 Growth of the PSS and FILP Budget: 1975-1985 82 3.7 Realignment of the Tanaka faction and Revisions to Postal Banking in the late 1980s: The Political Decline of Tanaka Kakuei 85 3.7.1 Abolishment of the Maruyu system and Imposition of Taxation on Savings 86 3.8 Decline and Ascent of Postal Savings Before and After the Bubble Economy 89 3.9 The "Big Bang" Financial Reforms and the Defense of Postal Affairs 93 3.10 Questionable Reform of the FILP 96 3.10 Conclusion 97 Chapter IV Contemporary Reform Initiatives, Recommendations 100 4.1 Can Koizumi Crack the Tanaka Faction Complex and Break the PSS? 100 4.2 Three Avenues for Reform 101 vi 4.3 Removal of Complete Guarantees on Deposits 104 4.4 Resilience of the Opponents to Reform: Expanding Links with the Private Sector 107 4.5 The Current Battle 109 Conclusion 112 References 116 Tables 128 Figures 140 Vll LIST OF TABLES Table 1: Sources of Government Revenue in the First Eight Fiscal Years: 1868-1875 (Unit: Thousand ¥) 128 Table 2: Japanese Yearly GNP per-capita Income (Unit: ¥) 129 Table 3: Postal Savings Accounts: 1893-1901.... 129 Table 4: Growth of Postal Savings and Investment of Deposits Bureau Funds: 1900-1928 (Unit: Thousands of ¥) 130 Table 5: Growth of Postal Savings and Investment of Deposits Bureau Funds: 1929- 1953 (Unit: Millions of ¥) 131 Table 6: Invested Funds for Post Life Insurance and Postal Pension Plan: 1930- 1953 (Unit: Millions of ¥) 132 Table 7: Liabilities of the Fiscal Investment Loan Program: 1953-1974 (Unit: Million ¥) 133 Table 8: Assets of Trust Fund Bureau: 1953-1973 (Unit: Million ¥) 134 Table 9: FILP Investments: 1953-1963 (Unit: Million ¥) 135 Table 10: FILP Investments: 1964-1974 (Unit: Million ¥) 136 Table 11: Comparison of a Teigaku deposit versus a Ten Year Fixed-Term Bank Deposit Withdrawn before Maturity (Contractual Rate = 2.45 percent) 137 Table 12: FILP Investments: 1975-1985 (Unit: Million ¥) 138 Table 13: Liabilities and Assets of the Trust Fund Bureau: 1985-2000 (Unit: Billion ¥) 139 viii LIST OF FIGURES Figure 1: Deposits Bureau/Overall Savings Deposits: 1930-1953 140 Figure 2: Private Bank Deposits vs Postal Savings: 1972-1985 141 Figure 3: FILP and General Account Budget out of GDP: 1953-2001 142 Figure 4: Private Bank Deposits vs Postal Savings: 1986-2000 143 LIST OF ACRONYMS BOJ: Bank of Japan BPOSB: British Post Office Savings Bank DIC: Deposit Insurance Corporation FILP: Fiscal Investment Loan Program JCP: Japanese Communist Party JDB: Japan Development Bank JNR: Japan National Railways KDD: Kokusai Denshin Denwa (International Telegraph and Telephone) LDP: Liberal Democratic Party (of Japan) MAC: Ministry of Agriculture and Commerce MOF: Ministry of Finance MP: Member of Parliament MPT: Ministry of Post and Telecommunications NACP: National Association of Commissioned Postmasters (Zenkoku Tokuteiyubinkyokuchokai) NTT: Nippon Telegraph and Telephone Corporation OECD: Organization for Economic Cooperation and Development PARC: Policy Affairs Research Council PLI: Postal Life Insurance PPP: Postal Pension Plan PSS: Postal Savings System SCAP: Supreme Commander of Allied Powers (U.S. Occupation of Japan commander: General Douglas MacArthur) X SME: Small and Medium-sized Enterprises TFB: Trust Fund Bureau xi ACKNOWLEDGEMENTS This thesis could not have been written without the assistance of numerous individuals. The majority of my writing took place in Vancouver at the Institute of Asian Research at the University of British Columbia. My research, however, was conducted in Canada and also in Japan during a three-month visit in the summer of 2003. Likewise, I am grateful to individuals in both countries for their favourable assistance and support in the writing of this thesis. I would like to extend my thanks to my advisors, Dr. Hyung Gu Lynn and Dr. Bill Wray at the Center for Japanese Research at the Institute of Asian Research for their valuable guidance and advice. I am also indebted to Dr. David Edgington, the director of the Center, who, as well offering me ongoing encouragement, provided me with a research grant to help facilitate my studies in Japan. Dr. Julian Dierkes and Dr. Yves Tiberghien of the Center, respectively, extended my knowledge of organizational theory and contemporary issues surrounding public finance and investment in Japan. As well, Professor Joong-Ho Kook from Yokohama City University and Dr. Tetsuyo Umemoto from Momoyama Gakuin University in Osaka, Japan, visiting scholars to the Center, educated me and opened up doors previously unknown to me. I am grateful to Dr. Tetsuyo Umemoto for introducing me to his colleague, Dr. Norio Takehara. From our conversation/correspondence in Osaka, Dr. Takehara provided me with favourable insight into his perspectives on public finance and investment in Japan.