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Monday, Dec. 5, 2005

JAPANESE PERSPECTIVES

Privatization hurdles: Japan Post should compete with banks on level playing field


The government bills drafted to privatize the state-run postal services were finally enacted into laws in mid-October, but there will be two major challenges ahead as privatization is carried out.

One is the how to reorganize, abolish or privatize government-affiliated financial institutions that have been reliant on postal savings for their funding. The other is how to make sure the post office can compete with private-sector banks on a level playing field during the transition to full privatization.

The first challenge concerns the "exit phase" of postal reform -- how postal savings deposits will be managed -- now that reform of the "entry" phase -- how money will be raised -- has been approved by the decision to privatize.

The government and the ruling Liberal Democratic Party appear to have set their sights on reorganizing, abolishing or privatizing the eight remaining government-linked financial institutions beginning in fiscal 2008. These entities had total outstanding loans in excess of 90 trillion yen as of March 2005.

One major objective of postal reform is to channel more funds from the public sector to the private sector and make sure the money is used efficiently. There will be resistance, of course, from vested interests and bureaucrats who stand to lose future "amakudari" positions in those public institutions, but now that the decision has been made to privatize the "entry" phase, it is only natural the "exit" portion be privatized as well.

The second challenge is to make sure the privatized postal savings system -- as well as the state-backed financial firms due to be privatized -- is put on a level playing field with private-sector competitors.

Unless this happens, the much-touted goal of postal reform -- the efficient management of funds -- will not be achieved.

Under the postal reform law, Japan Post will be disbanded in October 2007 and broken up into four entities that will independently handle mail delivery, over-the-counter services, postal savings and postal insurance -- all under a holding company. All shares in the postal savings and postal insurance entities will be put on the market by the end of September 2017.

Once the process is completed, the firms will be fully privatized and be no different from other private-sector financial institutions. But the problem here is that the process will take more than 10 years to complete.

The problem with so-called independent administrative bodies is that they use state assets cost-free. An easy way to understand their situation is to think about the difference between a state-run university and a private university.

A state-run university acquires and uses state-owned assets -- including affiliated hospitals -- for free. But a private institution has to borrow money at its own expense to cover the cost of obtaining land and building facilities. They are at a clear disadvantage when competing with their state-run counterparts.

It is not necessarily clear, however, how state-owned assets were transferred to Japan Post when it was established in its current form as an independent body.

Apparently, the main post offices throughout the country -- including the headquarters complex right next to Tokyo Station -- are state-owned properties for which Japan Post does not pay rent.

If the property rights were transferred to Japan Post, it would have to pay fixed-asset taxes just like any private-sector bank.

In an article in the Nihon Keizai Shimbun on Oct. 14, Professor Mitsuhiro Fukao of Keio University estimated that the government's cost of "protecting" Japan Post -- sparing it from deposit insurance fees, stamp and corporate taxes, and giving it the support needed to offer higher deposit interest rates -- amounted to 943 billion yen in fiscal 2004.

But in order for Japan Post to play fairly with the private sector, it must also pay either rent on state-owned properties or fixed-asset taxes. Postal operations must be streamlined so they can remain profitable after paying these additional costs.

Meanwhile, it must be noted that taxpayer money injected into private-sector institutions shows up on their balance sheets as debt. The major banks alone still have about 6 trillion yen in such debt on their balance sheets.

We also must pay attention to the possibility that the government might additionally inject -- in a rather backroom manner -- state-owned assets into state-run financial institutions that have no clear timetable for privatization.

Voters should keep this in mind and keep monitoring the transition process until the postal privatization is completed.

Teruhiko Mano is a professor at Seigakuin University Graduate School.


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