Japan to Privatize Postal System

October 14, 2005

Japanese Prime Minister Junichiro Koizumi made good on his promise to privatize the country’s giant postal system when the upper house of parliament, which had refused the measure in August, passed the postal reform bill by 134 votes to 100.

The earlier refusal prompted Koizumi to call an unscheduled election, which he won in a landslide. In doing so the Prime Minister overturned many long-standing Japanese political traditions. He personally picked a number of Liberal Democratic Party (LDP) candidates to run for election who supported him, shunting aside many party members who had opposed privatizing Japan Post.

The postal system has around $3 trillion in assets and, in addition to delivering the mail, performs a number of other services, including the sale of savings and insurance products, from around 25,000 offices throughout the country. Over the years Japan Post has been a stalwart supporter of the LDP, which has governed Japan for most of the post Wold War II era. Politicians frequently tapped the system’s enormous reserves to fund vote-winning public works projects (many of dubious economic value), and relied on party appointed rural postmasters to help drum up support.

Koizumi has long fought for reforming the system, even at the expense of his own party. He maintains that the capital tied up in Japan Post could be far more efficiently used by the private sector, and breaking up the state monopoly of the postal service represents a big step towards that goal.

Most analysts have applauded Koizumi’s efforts to end the practice of government borrowing at low cost from Japan Post in order to finance Japan’s huge debt load, which is approaching 150 percent of the country’s GDP. Every time Koizumi has taken a step towards that goal, share prices have risen, but today Japan’s Nikkei Index fell back by around .02 percent. Apparently the market had anticipated the news.

Japanese insurers stand to benefit from the privatization, as it will level the playing field for financial and insurance products, and could well stimulate the country’s highly competitive private insurance sector.

However the privatization will be tightly controlled. The first step is the formation of a holding company, which will take over control of the system, and separate it into four divisions: savings, insurance, postal services and a fourth for human resources and property management.

Starting in 2007, the company will begin to gradually self off parts of Japan Post, but the savings and insurance divisions will be permitted to maintain cross shareholdings in one another to protect them from takeovers.

The sell-off remains controversial as many of Japan Post’s branches are in rural areas and local populations largely depend on them for banking and insurance. There’s also the question of how many of the approximately 260,000 workers currently employed by Japan Post will retain their jobs.

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