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The privatization of Japan’s post office, which doubles as the world’s biggest savings bank, was hailed around the globe as a watershed free-market reform that would streamline the world’s No. 2 economy.

But just months before the October kick off date, a darker prospect looms over what will unseat Citigroup Inc. as the world’s biggest financial institution. Far from encouraging open competition, some are warning that the government-nurtured colossus could leverage its size to stamp out rivals, foreign and domestic.

Washington is pressuring Tokyo to ensure that won’t happen, and Japan is promising strict safeguards.

Japan Post does more than sell stamps and deliver letters. It also runs a postal savings bank with 500 million accounts and some 4,000 branch offices nationwide. Its ubiquitous post offices effectively act as sales agents for insurance and investment products as well as stamps.

For millions of Japanese, the post office is their only bank. The service is especially popular in rural areas shunned as unprofitable by commercial banks.

Sitting on assets of USD1.96 trillion, Japan Post secures about 28 percent of Japan’s household savings and is widely billed the world’s largest bank.

The first phase begins Oct. 1, with Japan Post being broken into four separate businesses, an insurance company, savings bank, mail courier and post office management company.

Initially held under a holding company, they will made independent by 2017.

Business leaders want assurances the new companies won’t get tax and regulatory breaks denied private competitors.

They are also worried Japan Post will be allowed to encroach on rivals by introducing new investment services and new insurance products before a level playing field is created.

There is additional concern the new companies will exploit implicit government guarantees on deposits to lure new customers. Basic deposits at commercial banks, by contrast, are only insured up to USD85,000. Even after October, the government will hold 100 percent of the companies until shares are sold on the stock exchange, starting as late as 2011.

Another issue is whether foreign firms will have equal footing to sell investment products through the newly privatized bank. So far, they have been granted only a minor role.

Japan Post’s finances are extraordinarily sound. Profit jumped 56 percent to USD16.5 billion in the fiscal year ended March 31, 2006, thanks largely to income from the new trust funds.