I suppose that, given all I wrote about Japan Post privatization while it was being haggled over, it’s odd that I didn’t post anything about it on Monday, when the privatization plan went into effect. But of course, what’s going to be interesting is what happens in the coming months and years; Monday was an important step, but not much happened that we could draw conclusions from. The single biggest problem is that the government still holds all the stock, with divestment from the financial services companies to be completed by 2017. But there’s a lot else to consider. Here‘s the Nikkei editorial:
Since the former national rail service became JR twenty years ago, this is the first large-scale privatization. The postal service, which began as a public institution 130 years ago, became a privately held enterprise under the Japan Post holding company on 1 October. The holding company came into the world a behemoth group with four companies (postal processing, post offices, postal savings bank, and life insurance) under its umbrella, total capital of 338 trillion yen, 24000 post offices, and 240000 personnel.
What cemented the privatization was public opinion, which pressed for postal reform that moved “from public to private.” In the election after the “postal dissolution” Prime Minister Jun’ichiro Koizumi decided on, the LDP gained an overwhelming majority in the lower house. [Koizumi called a snap election and flatly told voters that he regarded it as a referendum on Japan Post privatization.–SRK] This could be regarded as a vigorous rejection of the public investment [system] that, using trust in the government as a shield, corralled capital from postal savings and life insurance and led to bureaucratic bloat. We must not forget that that was the starting point.
The postal savings bank will be a sales outlet for housing loans from some regional banks, and also aims to fund its own entry into financing and foreign currency deposits. Financial institutions have cautioned about pressure on the private sector [that Japan Post Holdings could exert by exploiting its still-strong connections with the government], but on the other hand, there have been gestures toward seeking tie-ups with a clear eye on the post office network. What is more important than anything else is that conditions for fair competition between the privatized Japan Post and existing financial institutions be preserved. The Japan Post Privatization Committee, which will review these expansions of operations, has a lot of responsibility. The Finance Agency and the BOJ should also monitor its health unsparingly through inspections and similar measures.
What both internal and external investors will be paying attention to is where capital is routed by the two financial institutions after privatization. Under the shadow budget system, the postal savings bank had become a dumping ground for mass-issued federal bonds. It will be pressed to diversify deployment of capital into appropriate asset and debt management. The plan is to decrease the postal savings account balance (182 trillion yen at the end of August) moderately but steadily.
The Asahi editorial focuses more on how privatization will affect customers:
These episodes point to serious corporate ills. The new Japan Post management must ensure it competes with industry rivals in a legal and fair manner. The first test for the postal giant’s compliance will be whether it starts properly explaining to customers the risks involved in its financial products.
The most serious is poor legal compliance. Japan Post has been plagued by endless embezzlement and other scandals involving postal workers. Illegal business practices are rampant in postal insurance operations–postal insurance policies are often sold without the legally mandated direct meeting with the purchaser. In fact, compliance has been so poor, the Ministry of Internal Affairs and Communications has given the postal insurance service a record-low quality rating of “D.” Recent evidence has also emerged that employees unlawfully destroyed documents that legally should have been preserved.
With privatization has also come the end of government guarantees for postal savings and insurance policies–yet Japan Post will still be selling a wide range of risk-carrying financial products, such as investment trusts.
For many years, people have entrusted their savings to government-guaranteed postal accounts. Many have no understanding about risky financial products and the fact that investors can lose their initial investment principal if the market turns sour.
That makes it imperative for Japan Post to clearly offer detailed explanations about such risky investments to customers. Should troubles emerge over sales tactics, this would damage consumer trust–its reputation for reliability–and have a serious effect on its bottom line.
That’s a genuine worry. Japan has a very good educational system, but financial products are complex things, and people’s trust in known brands has enabled a lot of salespeople to put one over on a lot of consumers. It’s people’s responsibility to assess risks as best they can before pouring their money into an insurance policy or what have you; however, I agree that Japan Post’s overseers need to be extra careful to make sure representatives are not using verbal legerdemain to imply that investments are still protected by the government in ways they are not.