Towards a True Reform of the Postal System

September 21, 2005

 

1. Introduction

 

Flying the banner of postal privatization, the Liberal Democratic Party of Japan scored an overwhelming victory in the lower house elections on September 11, 2005. Having gained resounding popular support for this plan, which the Koizumi cabinet refers to as the “inner citadel of structural reform,” the privatization of the postal system is now set to gain momentum. Aiming at speedy implementation, the government has already resubmitted the postal privatization bill in a special Diet session. Against this background, we believe it is important to evaluate the postal reform plan once again.

We agree that a genuine reform of the postal system is necessary. However, we also find that the bill resubmitted by the government contains a number of serious flaws. Having gained overwhelming support from the public, the LDP should revise the proposal and introduce a bill that would achieve a true reform of the postal system. Postal privatization is indeed an important task, but the contents of privatization may be even more important than whether to take that step or not. In fact, an ill-conceived privatization may make matters worse. For example, bad management of the privatized postal companies may impose a heavy burden on taxpayers. On the other hand, if the postal system is privatized in its current gargantuan shape, its enormous postal savings and insurance operations may just overwhelm private financial institutions. If the creation of privatized postal companies ends up driving existing banks and insurance companies into bankruptcy in the process, the privatization process should be considered a failure. Thus, having won the general election, important next challenges for the government are how to ensure that competition on an equal footing prevails and the privatization process is properly executed.

 

In this proposal, we present our views on and proposals for the privatization of the postal system.

 

 

2. Problems of the postal system

 

              At the moment, the postal savings system and the postal life insurance scheme appear to stand on a sound financial footing and do not seem to be plagued by any major problems. In reality, however, the revenues of the postal savings and insurance system are bloated by government subsidies.  Then, they compete with private sector financial institutions, which do not receive such explicit subsidies from the government.

 

More specifically, the current postal system has the following problems.

 

(1)      Japan Post is largely exempted from taxes such as corporate taxes and stamp duties. Although any surplus generated by the postal services is supposed to go to the treasury Japan Post is not expected to generate such surplus in the near future and any positive contributions to the treasury are unlikely to be forthcoming.

(2)      Postal savings and life insurances are guaranteed by the government at no cost. This government guarantee may compensate for having to provide a unified country-wide service, but it also seriously distorts the competitive environment for other financial institutions.

(3)      There are complex risks involved in the running of businesses with very different characteristics (postal delivery services, the postal savings and the postal insurance) at the same time.

(4)      The amount of savings deposited with Japan Post exceeds that of the four mega-banks combined, while the assets of the postal insurance match those of the four largest life insurers.

(5)      Funds collected through postal savings and insurance are allocated inefficiently through government-owned financial institutions.

 

Note that the most important problems are those related to the savings and insurance business. In other words, the reform of the postal savings and insurance system is more important than the reform of postal delivery services.

 

3. “Privatization” according to the postal privatization bill

 

The postal privatization bill that is expected to resubmit to the Diet, unfortunately, is not going to resolve the above-mentioned problems. The key points of the postal privatization bill can be summarized as follows:

 

(1)      The abolition of government guarantees on all new postal savings and insurance contracts from April 2007.

(2)      “Complete privatization” is to be attained by April 2017. Yet, while the government’s shareholdings in the postal bank and postal insurance corporations are to be reduced to zero by 2017, the government will continue to hold more than a third of the shares in the holding company that holds 100% of the postal delivery and the postal network corporations even after “complete privatization.”

(3)      Even after “complete privatization,” the postal network and postal delivery corporations as well as the holding company will be able to hold shares in the postal bank and postal insurance businesses.

(4)      Government guaranteed deposits received before April 2007 and deposits received after April 2007 not guaranteed by the government will be formally separated into “old accounts” and “new accounts.” The postal bank, however, will then bundle those funds and invest them; any profit or loss from the “old” or “new accounts” will accrue to the postal bank.

(5)      The privatization plan does not contain any measures to prevent the proceeds from the sales of the postal bank and the postal insurance company from being used to cover the losses of postal delivery and the postal network corporations.

 

This bill suffers from many serious problems. First, deposits received until April 2007 will continue to be government guaranteed, meaning that the competition in the financial industry will continue to be distorted. Second, even if postal savings will officially no longer be government-guaranteed, if the government continues to hold a large amount of shares in postal savings corporation through the holding company, savers are likely to believe that their deposits are still backed by the government. Third, if the postal delivery and the postal network corporations –which continues to be under the government control – are allowed to acquire shares in the postal bank and the postal insurance corporations, there remains a risk of de facto re-nationalization. The fourth and biggest problem is that the transition period to “complete privatization” is too long. Since the holding company continues to enjoy a government guarantee for the postal savings in the “old accounts,” it may end up expanding the postal bank and postal insurance businesses even more, taking advantage of these privileges.

 

4. Proposals

 

A privatization that truly deals with the problems of the postal system would include the followings.

 

(1)      To ensure a level playing field, the postal bank and the postal insurance should each be immediately split into, say, four smaller entities (for example, by region). (An alternative would be to speedily shrink their scale considerably.)

(2)      Again to provide a more level playing field, the profits or losses of the “old accounts” of the postal bank and postal insurance funds which continue to enjoy explicit government guarantee, should be completely separated from the postal bank and the postal insurance company.

(3)      After the postal bank and postal insurance have been split up or shrunk, the government should sell off its shareholdings within three years. The ten year period envisaged in the postal privatization bill is too long and the incompletely privatized postal bank and postal insurance in the meantime are likely to disrupt the functioning of the financial sector.

(4)      If the problems of the postal bank and postal life insurance are completely solved, postponing the privatization of the postal delivery and postal network businesses may not be that costly. However, privileges vis-à-vis private parcel delivery companies should be greatly reduced, new entry to the business should be facilitated, and competition should be encouraged. In addition, if the privatization is to be postponed, the postal network company should clarify its scope of business.

(5)      The postal delivery and postal network corporations, which the government will continue to control, should be barred from holding shares in the privatized postal bank and the postal insurance or from influencing their management decisions by getting involved in personnel affairs.

 

If such a swift privatization is achieved, Japan Post may face a serious redundancy of workers. To minimize the pain of employment adjustment, it may be necessary to take some measures to protect employment using the postal delivery and postal network companies.

 

              A few additional changes to the government bill, such as those suggested here, could solve many of the current problems of the postal system and achieve a true privatization. Having purged the anti-reform faction from its own ranks and having gained an overwhelming mandate in the national elections, the LDP, lead by Prime Minister Koizumi, could now surely propose a privatization plan that would form a part of true reforms. What Japan needs now is politicians with strong determination and courage who continue to push for reform.

 

This proposal is written and endorsed by the following members of the Japanese Shadow Financial Regulatory Committee:

Takatoshi ITO (Tokyo University)

Zenichi SHISHIDO (Seikei University)

Kimie HARADA (Chuo University)

Mitsuhiro FUKAO (Keio University)

Takeo HOSHI (University of California, San Diego)

Kaoru HOSONO (Gakushuin University)

Masaya SAKURAGAWA (Keio University)