Koizumi’s posthaste approach to reform pushes envelope
Koizumi is confronting the final citadel, containing many from his own party, blocking his career-long crusade to privatise Japan Post. The decisive vote in the upper house may happen as early as Friday but the numbers remain too close to call.
If Koizumi fails, he vows he'll force a lower house election. If he succeeds, an awesome collection of financial assets totalling some Y350 trillion (USD4.1 trillion) will begin a 12-year transformation that will also reshape Japan's financial system.
For the most part, Koizumi's LDP opponents simply want to keep Japan Post for pork and patronage. However, there's an awkward possibility the Koizumi plan is so deficient they might be doing the country a favour by frustrating it.
There are deep flaws in the plan, some intrinsic, some introduced to keep the legislation alive, and there is the worrying portent of the Japan Highway Public Corp “privatisation''. JH, surely Japan's worst large public corporation, is to be restructured and sold, though it is gripped by a corruption scandal that this week spread from a ring of former JH officials to current senior executives. Yet there is still no suggestion the reorganisation of JH and three smaller agencies into six “private'' regional road companies should be delayed to avoid JH's financially incompetent and possibly law-breaking headquarters staff getting distributed among the new companies.
Even before the scandal, this was a questionable exercise. Each Baby JH will remain one-third government-owned and new borrowings will still be government guaranteed. JH's Y40 trillion debt will be unloaded into a special public corporation, which will use revenue from JH toll roads to pay down the liabilities.
So, what's left to the heirs of an organisation that has carpeted the countryside with over-engineered concrete and tarmac? Why, borrow again, build more roads, and keep the construction industry and the politicians happy, of course.
This is not what Koizumi planned for road privatisation. But it is what has resulted from the incredible resistance to proper reform from over-mighty bureaucrats and the patronage merchants who still pervade his own party. The Japan Post project has been exposed to similar institutional warping.
Japan Post's postal saving bank and its postal insurance business are the biggest purchasers of zaito bonds, by which government corporations are funded. They own Y140 trillion worth of bonds and JH is the biggest single borrower. The Ministry of Finance manages the zaito program and issues the bonds. Think of the relationship this way, says Yasuyo Yamazaki, a noted authority on public-private finance: Japan Post is the prudent creditor; JH is the profligate debtor; and MoF is the banker that obliges one to lend and allows the other to continue borrowing. Which two of these three institutions are most in need of urgent reform?
Koizumi and Heizo Takenaka, the minister in charge of the privatisation, argue that freeing Japan Post from the government-mandated duty of buying zaito bonds — instead channelling its assets into the private sector — is the intent of their reforms.
But when and how? It's not clear from the legislation. The paucity of detail about a project Koizumi describes as the greatest financial reform in a century is just one astonishing feature of this project. We do know that in 2007 the government is supposed to separate Japan Post into a mail distributor, a counter services company, a savings bank (the world's biggest, with deposits around Y330 trillion), and an insurance company (Japan's biggest, currently with policies worth Y120 trillion), under a government holding company.
Over the following 10 years the holding company is to sell portions of the postal bank and the insurer until they are completely privatised in 2017.
But the legislation allows group companies to invest in one another so that, for instance, the government might retain indirect stakes in the bank and insurance companies through the mail and counter service companies. Another provision, belatedly introduced, allows the holding company to buy back shares.
A mysterious new agency will superintend the postal bank's estimated Y150 trillion of term deposits that will continue to be covered by government guarantee. There is a healthy suspicion those guaranteed funds will be heavily invested in zaito bonds.
Further, as Yamazaki points out, in the decade before full privatisation is supposedly achieved, Japan Post will spawn two huge financial institutions that are, in fact, government-owned and controlled. One will be a mega-megabank (to distinguish it from the mere megabanks created out of Japan's banking crisis at the cost of Y40 trillion of public funds). Its deposit base will be twice that of the merged Mitsubishi Tokyo Financial Group-UFJ Holdings.
As those businesses become more “normal'' they will — they must — crowd the existing financial institutions. The postal bank, for instance, will move into corporate and mortgage lending, areas now forbidden to it. Prospects are particularly grim for regional banks and finance companies.
Japan Post plans to distribute mutual funds through its counter services company. With an unmatchable distribution network and first access to Japan Post customers, international fund managers think the new business could be worth USD2 trillion.
It is clear now why Mr Koizumi left Japan Post privatisation, an endeavour he probably always knew would exhaust his political capital, until the final stage of his premiership.
But it is a cause of serious concern that his “crash through or crash'' strategy leaves unresolved — and largely undiscussed in the public arena — so many serious questions.
If the legislation passes, those issues will have to be settled after he's gone by people in his party and the bureaucracy who don't share his faith in the transformative power of private ownership.
