Public corp. not answer to postal savings woes

Riding on the Liberal Democratic Party's strong showing in the July
House of Councillors election, the administration of Prime Minister
Junichiro Koizumi is heading toward fully fleshing out its reforms. With work under way on reforming public corporations with the
ultimate goal of abolishing or privatizing them, debate on reforming
the three postal services has heated up. The three services–mail delivery, savings and life insurance–will
be integrated into the planned "postal public corporation" in 2003. To build an efficient economy that can fully tap into the private
sector's vitality, however, a thorough reform of the three postal
services is inevitable. This is the first in a series on the issues surrounding the three
postal services and their reform prospects. Nine-thousand postal savings employees nationwide braved one of the
hottest summers ever to call on depositors in a campaign to persuade
them to reinvest their matured time deposits in postal savings. The amount of money involved–106 trillion yen in 10-year time
deposits that matured in fiscal 2000 and 2001–represents a tempting
prize indeed. The time deposits, with their attractive annual interest rates of
about 6 percent, were highly popular in the early 1990s. Banks and securities houses have been putting new financial products
on the market to woo the freed-up cash. Nonetheless, post offices are determined to keep their grip on 70
percent of the matured savings–except the amount exceeding the 10
million yen limit for time deposits–to gain the upper hand over
private financial institutions in winning over depositors. In July, when repayments for matured savings exceeded 10 trillion
yen, post offices succeeded in reabsorbing 73.3 percent of the
matured savings. Postal savings' selling point is their central government backing,
leading to the belief that they will never go bust. Because postal savings do not pose a risk of bankruptcy, post
offices do not have to pay deposit insurance fees. They also do not have to pay corporate and residence taxes because
they are run by the central government. Private financial institutions do not enjoy such benefits, which the
Federation of Bankers Associations of Japan has described as latent
subsidies that amount to 400 billion yen a year. The post offices' main financial product–fixed savings–yields
compound interest every six months for a fixed period of 10 years,
and can be canceled any time after half a year. Bankers have pointed out that private financial institutions can
hardly compete, given such a system is made possible through the
strengths of state-run bodies. As of the end of last March, central government-backed postal
savings collected a total of about 250 trillion yen–almost nine
times more than the amount of deposits at Sumitomo Mitsui Banking
Corp., the private bank with the greatest number of individual
deposits, accounting for more than one-third of the nation's
outstanding individual savings. The savings held by post offices have been loaned to public
corporations under the fiscal investment and loans program. It is no exaggeration to say postal savings are a major nutrient
contributing to the size of public corporations and the huge number
of wasteful projects they generate. A structure that brings a huge portion of individual funds to postal
savings, which are channeled into public corporations, has resulted
in reducing funds through private financial institutions and stock
markets to be used for corporate activities. About 40 percent of individuals in the United States channel their
financial assets into stock holdings. In Japan, the figure is only 9 percent, although 44 percent of
individual financial assets are channeled into the central
government, municipalities and public corporations via bonds and
financial products, mostly fed by postal savings funds. Currently, about 30 percent of the money collected by corporate
pension funds is invested in stock. If postal savings operations are privatized with the same percentage
of postal savings flowing into the stock markets, about 75 trillion
yen will go into the markets and push up stock prices, according to
one major bank's predictions. Postal savings have grown into the world's largest financial
resource. There is no doubt that postal savings suppress private financial
institutions and stifle the vigor of economic activity in the
private sector. So that individual savings can effectively benefit the Japanese
economy, serious discussion is needed to map out measures for the
private sector, in which market principles function more smoothly,
to have access to more funds. On the sixth floor of the Postal Services Agency building in
Kasumigaseki, Tokyo, fund managers sit in front of an electronic
board displaying stock prices and foreign exchange rates, creating
the impression of a dealing room at a securities house. Under Prime Minister Ryutaro Hashimoto's administrative reforms in
1997, the decision was made to integrate the three postal services
into the Postal Public Corporation in 2003. In April, the fiscal investment and loans program was reformed,
resulting in the abolition of the system of entrusting the
management of all postal savings funds to the central government. In principle, such funds will be invested in financial markets.
Funds previously managed by the government will be gradually handed
over to the Postal Public Corporation, and the corporation will
handle all postal savings funds in 2007. The Postal Services Agency's dealing room is a manifestation of the
reform. Its dealers still mainly invest in bonds, but operations
will be expanded to investment in domestic and foreign stocks
through trust banks. Many observers, however, claim such measure will not significantly
improve the wasteful way funds are channeled to public corporations,
but instead could impose a new burden on taxpayers. The state-run Postal Public Corporation's staff will be public
servants. Unlike fund managers at private financial institutions,
they will not be paid according to performance. It will be difficult to hold them accountable if they lose money,
and tax money will have to make up for losses. Some of the postal savings now allowed to be invested freely have
totted up 910 billion yen in latent losses in domestic and foreign
stocks. If more funds are allowed to be invested freely, the public will
face a greater risk of having to pay off greater losses. On the other hand, if most postal savings are invested in less risky
government bonds and bonds used to finance the fiscal investment and
loans program, the conventional flow of postal savings funds to the
central government and public corporations will be in no way
reformed. According to Keio University Prof. Kazuhito Ikeo, the bad pairing of
a Postal Public Corporation and self-management of all postal
savings will create a conflict that cannot be ignored. Experts and financial organizations have made proposals for postal
savings reforms. The proposals include: dividing postal savings services into private
operations to avoid suppressing private financial institutions;
significantly downsizing postal savings by restricting them to only
accepting individual savings in a certain area; and investing postal
savings mostly in government bonds as a kind of "public savings
bank." Based on his pledges to hand over public corporations to the private
sector and let the private sector take over whatever services it
can, Koizumi put forth a reform beyond the integration of the three
postal services into a public body at a June gathering on how to
deal with the three services. It is hoped that the parties concerned will realistically examine
the downside of the huge state-run financial institution. Copyright 2001 The Daily Yomiuri
Copyright 2001 The Yomiuri Shimbun/Daily Yomiuri.
Source: World Reporter (Trade Mark) – Asia Intelligence Wire.THE YOMIURI SHIMBUN/DAILY YOMIURI, 22nd August 2001