The break-up of Japan Post creates the world's largest bank
The break-up of Japan Post creates the world's largest bank
Japan's financial services industry has entered a new era with the reorganisation of Japan Post on October 1st. The move has created the world's largest bank, Japan Post Bank. This has the potential to invigorate Japan's financial sector by encouraging more efficient capital allocation and by exposing management of the country's vast pool of under-utilised postal savings to greater market forces. However, there is also considerable uncertainty as to whether the net effect of the restructuring will be to promote financial-sector competition or to stifle it. In addition, the diversification of investments implied by the restructuring could increase financial risks as well as lead to turbulence in the Japanese government bond (JGB) market.
The restructuring of Japan Post is the first step in a ten-year privatisation programme. In terms of "privatisation", no sale of government assets has yet occurred. As of October 1st, the former Japan Post has simply been spun off into four commercial entities under a 100% government-owned holding company. The division of the four new businesses reflects the post office's previous main areas of activity. Thus, there is a bank (Japan Post Bank), an insurance company (Japan Post Insurance), a postal delivery service (Japan Post Service) and a branch-management business (Japan Post Network). The latter of these is responsible for running the nation's 24,000 post offices.
The privatisation plan involves the holding company, Japan Post Holdings, selling its entire stakes in the banking and insurance businesses by 2017, with some of that divestment expected to take place via stockmarket listings as early as 2009 or 2010. The holding company will keep control of the mail delivery and branch-management businesses, although it will gradually sell up to around two-thirds of its own shares.
A shot in the arm for the economy?
Because of its potential impact on the commercial activities of private-sector banks, as well as on the JGB market, the spinning-off of Japan Post Bank is being followed with particular interest by the financial sector. Part of the rationale for splitting up Japan's 136-year-old post office is to increase the financial returns on the ¥188trn (US$1.6trn) worth of savings deposits held in postal accounts. Until now, the postal savings system has been able to offer slightly higher returns than private-sector banks, thanks to lower costs resulting from tax exemptions and a full government guarantee of deposits (which has made paying insurance deposit premiums unnecessary, in addition to attracting savers with the guarantee itself).
However, given Japan's ultra-low interest rates and the post office's conservative investment strategy (it is thought that some 70-80% of postal savings are invested in low-yielding JGBs), even these returns have been very modest. Promoting more productive investment of Japan's savings is an important policy goal given the burden of caring for an ageing population; it would also help to inject more dynamism into the economy by encouraging capital to flow to where it is most needed and to where the returns are potentially most attractive.
Separating postal savings from the post office's other arms, and turning it in effect into a proper bank, is a key step in this transition. The newly created Japan Post Bank will be free to concentrate on banking, and its new status will enable it to diversify into fresh areas of business such as mortgage lending and credit cards. To some degree, this diversification will also be forced upon the new bank. Some of the special treatment afforded to its predecessor will be revoked, obliging Japan Post Bank to invest more adventurously in order to retain depositors–and, ultimately, to attract investors once it lists on the stockmarket.
Competition concerns
However, private-sector banks are eyeing the creation of Japan Post Bank with considerable concern. Although it will lose the advantage of blanket deposit guarantees on all savings, the instalment accounts that make up perhaps two-thirds of its deposits will still enjoy full protection. This, combined with fears that the new bank will continue to enjoy special treatment because of its government links, underscores the extent to which Japan Post Bank's creation has brought into focus issues relating to competition.
On the one hand, retail financial services in Japan are often inefficient and unimaginative, and the sector is crying out for the injection of world-class competition. On the other hand, it is far from clear that Japan Post Bank is the ideal entity to achieve this, given that it has almost no experience of sophisticated asset-management or financial-product innovation. Private-sector banks (particularly the smaller regional banks) are already worrying about the potential for Japan Post Bank to encroach on their turf by expanding into new areas of business such as housing loans. Some banks also fear that Japan Post Bank's very size makes it too big to fail, giving it an unfair competitive advantage by allowing it to pursue riskier strategies without fear of the consequences.
Increased risk exposure
This, of course, is not simply a question of competition. Japan Post Bank's lack of experience in many of the business areas familiar to private-sector banks–from lending to small businesses or credit-card holders to investing in complex financial instruments–is itself a source of considerable risk. To succeed in these areas, the bank will need to adopt a more commercial culture and learn new risk-management techniques. This, along with the need not to destabilise financial markets with large shifts in asset allocations, suggests that the new bank will diversify only slowly.
Nonetheless, this diversification will happen. A related challenge will be to ensure that Japan Post Bank's expected reduction in its JGB holdings does not create undue turmoil in financial markets. As interest rates in Japan slowly rise (although the likely timing for such rises is being pushed back owing to the current market uncertainty), the value of its massive JGB holdings will fall and the bank will have to rebalance its portfolio, especially as scrutiny of its balance sheet will gradually become subject to more commercial criteria. However, it will have to be careful to avoid aggravating the problem by selling JGBs too aggressively, which would simply depress their value further and which would also cause wider problems for the financial sector at large. For example, other banks could see the value of their own JGB holdings, which are also substantial, fall.
In the longer term, one of the challenges for the privatisation of Japan Post Bank (as also for that of the insurance company) will be balancing the need to generate an adequate return from its sale with that of protecting the interests of smaller competitors. From the point of view of privatisation proceeds, the government will want to ensure that the new bank is as successful as possible. This is particularly important given the government's indebtedness. But if Japan Post Bank is too successful, it could crowd out competitors and harm the overall dynamism of the banking sector. Clearly, it would be a nightmare if Japan Post Bank's inexperience meant that its move into new business caused it to fail (or to come close to doing so). But by the same token, would too much success be equally unwelcome?
