The plans by Japanese Prime Minister Koizumi’s government to privatize the Japanese postal service is likely to have an impact far beyond the institutional equity market, say analysts in Tokyo. With retail deposits totalling approximately $3.3 trillion – enough money to make the Japanese post office the largest financial institution in the world – it is also likely to increase the appetite of Japanese retail investors for investing in shares.
The post office privatization reflects official recognition that the Japanese financial system is inefficient, and that reform is necessary to develop a banking and business culture that can allocate capital more efficiently.
As ever in Japan, reform will come slowly. In September, the Japanese cabinet adopted the basic principles needed to privatize the Japanese postal services over a ten-year time frame. Under this plan, Japan Post’s four areas of service – mail delivery, management of post offices, savings deposits and life insurance – will become separate businesses in April 2007. Progressive privatization will then occur over the following decade.
Privatization of Japan’s PSS will change the Japanese financial system. Funds previously directed into the public sector will then be channeled into the private sector. To date, Japanese retail investors have remained highly conservative, regarding investment as speculation and equating the stock market with a casino. As a result, they have preferred the security of guaranteed bank deposits – and especially that of the Postal Savings System (PSS), even though this has resulted in annual interest rate returns of less than 1%.
The Japanese government has also discovered moral hazard. It has realised that government guarantees on banking deposits have allowed the Japanese public to ignore the underlying stability or instability of private sector banks and brokerage firms. Realizing that this resulted in irresponsible behaviour, in April 2002, the Japanese government began imposing limits and next year all interest-bearing demand deposits in private banks will become subject to guarantee limits on deposits over Ґ10 million.
This is likely to have important consequences. Banks will have to demonstrate their health and Japanese investors will no longer be able to assume their deposits are 100% guaranteed.
Combined with a general need to seek higher returns as more Japanese citizens advance towards retirement, as well as more intensive marketing by the banks, this is likely to increase awareness of alternatives to bank deposits.
If the Japanese public abandons a cautious approach based on government guarantees and preferential tax treatment for PSS deposits, and begins to invest savings in private banks and other investment vehicles, it will liberate trillions of Yen for productive use by the private sector. This should help to accelerate Japan’s incipient economic recovery.
PSS privatization will also push Japan to more efficiently allocate capital and account for risk. The government will be forced to become more fiscally prudent. Since the postal service would no longer be required to purchase government securities, Japanese Government Bonds (JGB) will have to be sold to private investors. Investors are less likely to be forgiving about chronic budget deficits and will need a risk-reward ratio that balances the ability of JGBs to provide stability, liquidity, diversification and Yen exposure with an adequate rate of interest.
With $3 trillion or more flowing into Japanese and other securities over the next decade as Japan Post is privatised, the increased liquidity will attract foreign as well as domestic participation in the JGB market. That will necessitate an abandonment of the zero interest rate policy that has existed in Japan since 1999.
The Japanese Ministry of Finance is planning road shows for foreign investors in New York and London next month to familiarize investors with the government’s plans to privatize the PSS, the investment potential of JGBs, as well as other recent trends and developments in the Japanese financial markets.