Japan, Part II
Last week we addressed some of the problems faced by Japanese
Prime Minister Koizumi as he attempts to reform Japan''s
moribund economy. First and foremost Koizumi will push for
the banks to call in their bad loans, a painful step that will result
in greatly increased unemployment, but one that is necessary for
true capital formation down the road. On the spending side,
there is still much debate as to whether or not Koizumi can
afford to cap government spending like he originally planned,
especially in light of the damage such a policy would inflict
when coupled with an aggressive bank reform program. The
prime minister has already begun backing away, recognizing that
some spending programs may be required to alleviate the pain
from other austerity proposals.
But one of the chief ideas Koizumi has vowed to implement is
reform of the Japanese postal savings system. Recently, when I
was in Asia, I picked up an article from The Asahi Shimbun, a
Tokyo paper, which had a helpful Q&A on the very unique
nature of Japan''s Postal Services Agency. Suffice it to say,
Japan''s post office is not like our own neighborhood outlets.
Admittedly, the following is really for policy junkies. But the
issue is an important one for Japan, and the fate of Japan is
obviously of vital concern not just to the U.S., but the global
economy as well. Following are some brief excerpts.
Koizumi wants to privatize the postal system.
Q: What are the three services currently offered by the Postal
A: The agency oversees mail delivery, postal savings accounts
and postal life insurance policies.
Q: Why should these three state-run services be privatized?
A: These services are run by the state because they were
established at a time when many private-sector enterprises were
still in their infancy. As such, the government took it upon itself
to ensure that the public had access to a reliable and standardized
means of communication, as well as a safe place to deposit their
However, there are no longer valid reasons for keeping these
services in state hands. The private sector has matured, and there
are legitimate concerns that the expansion of these state-run
services is hurting private enterprise.
The Postal Services Agency now dwarfs the competition in each
of the three services it offers, being about two to three times the
size of leading private competitors in each sector. For example,
the current total of all postal savings deposits is 255 trillion yen,
about one-third of the total balance of individual savings deposits
in the nation''s banks. [Including life insurance premiums, the
figure is 372 trillion yen, or close to $3 billion.] In this sense, the
system is depriving the private sector of business opportunities.
Q: Nonetheless, the postal savings system is viewed as safe
because it is guaranteed by the government. Isn''t it true that
many people actually prefer the system as it is?
A: It''s not as simple as it sounds. In the private sector, all
financial institutions are obliged to pay taxes and join savings
insurance funds. The are also required to pay premiums for use
in the event of an emergency. However, the postal savings
system is exempt from taxation. Moreover, if a deficit should
occur because its operations fail, the Postal Services Agency can
always count on public aid. That''s why it''s not obliged to
insure its deposits. Such privileges come at cost, though. The
invisible costs of the system as it currently exists means that
taxpayers are ultimately footing a bill of as much as 400 billion
to 500 billion yen a year.
[The Postal savings system actually posted a loss of about $10
billion in 2000.]
Q: But isn''t postal savings managing the funds effectively?
A: There are problems there, too. Until recently, the funds were
entrusted to the Finance Ministry with a guarantee of relatively
high interest. However, these funds were wastefully spent under
the fiscal investment and loan program and used to ensure the
survival of many inefficient special corporate bodies. That''s
why the system of entrusting funds to the Finance Ministry was
abolished at the end of March.
In April, the Postal Services Agency of the Public Management
Home Affairs, Posts and Telecommunications Ministry began
managing the postal savings funds at its own discretion. In
addition to buying national bonds, the ministry also plans to
invest in domestic and foreign stocks. Furthermore, the
operation will no longer have a guaranteed rate of return like it
[Sound familiar? The Bush proposal to privatize a portion of
Social Security in the U.S.?]
Q: Are you saying the funds could be reduced?
A: No. Because the system is government-backed, any incurred
deficit will be made up with public money. Of course, the bill is
passed on to the taxpayer in the end.
What''s more, because the amount of operational funds is so
huge, there is also the problem of how it could negatively affect
stock prices. The combined total of postal savings and postal life
insurance funds come to some 370 trillion yen. The sum is
roughly on a par with the total value of the outstanding balance
of government bonds issued, or the total market value of all
shares listed on the Tokyo Stock Exchange. That''s why some
observers are concerned that these funds are like a whale landing
in a small pond. There are even fears that the funds may end up
being used in the government''s so-called price-keeping
operations, which are aimed at propping up share prices when the
[The Financial Times recently reported that the investment of
postal funds into the market is still under consideration.]
Q: Still, people can trust the postal savings system more than
many banks, which are awash with bad loans.
A: True. Banks have lost the confidence of many depositors, and
that''s helped spur the growth of the postal savings system. Of
course, if too much money is concentrated in postal savings
funds, and if the money is then invested in national bonds, it will
lead to too much money being channeled into the state. This will
weaken the ability of private industry to trade money in the
market and hurt the normal flow of funds being channeled into
growth industries, where there is a significant need for capital.
Next week, back to "globalization."