Yes he Kan? Kan faces early test – postal votes, or the people’s?

New prime minister Naoto Kan has to make a major decision that will likely characterize his style of leadership going forward.

The decision revolves around the current postal reform legislation – the bills, which would reorganize Japan Post to ensure greater government control and a firmer mandate of universal service, have already passed the Lower House but must pass the Upper House to become law. But there isn’t enough time in the current Diet session to get the job done in the Upper House. Kan has the option of extending the Diet session to get the bills passed, which would postpone the looming Upper House election. But should he?

The postal bills are incredibly divisive, potentially dangerous as policy, and have been crafted to pander to special interests without much serious thought to Japan’s long-term future. Bending over backwards to get the bills passed would be a clear sign that the DPJ-led government needs to rely on postal worker support to stay in power. He and his party govern in a coalition with the PNP, a small party with the postal workforce making up the bulk of its support base. The PNP has threatened to leave the coalition and deny the DPJ an outright majority in the upper house unless the bill is passed early.

On the other hand, not postponing the Diet session would imply Kan is opting for an early election, in other words he could capitalize on the support of the general public afforded him in the wake of his appointment as PM. Sure, this option might lose him the PNP, but he might not need them come July if things go his way.

So which will it be? Kan has apparently promised to decide on this tomorrow morning. I eagerly await his decision.

107 thoughts on “Yes he Kan? Kan faces early test – postal votes, or the people’s?”

  1. “The postal bills are incredibly divisive, potentially dangerous as policy, and have been crafted to pander to special interests without much serious thought to Japan’s long-term future.” So you say, but observers who lack your ideological blinkers have noticed that the bills in fact uphold the traditional view that postal services should be public enterprises, not commercial businesses, and thus “pander” to what most Japanese people actually want, rather than what the kind of people who created the current financial mess insist is good for them. But by all means carry on with the neoliberal kneejerking: it’s totally unconvincing, but it’s very entertaining.

  2. I agree that the postal service should be public, but that doesn’t mean the post office should also be the nation’s largest bank and life insurance provider. Those are bloated institutions that have long outlived their usefulness.

  3. I’m totally against privatization of postal service and al. usually, but…

    These postal institutions are also one of the big Amakudari hives, and not passing these bills may help getting rid of them.

    A lot of old geezers fearing for their cushy retirement posts right here, and Kamei is there to defend them all…

  4. The description “bloated institutions that have long outlived their usefulness” applies to a lot of private banks and other such institutions these days.
    I’m curious, BTW, how so many Mutant Frog writers came to share the same Koizumi-like political views.

  5. The postal service is a commercial business any way you look at it. And it has many well-run competitors covering every sector in which it operates. So why is it state-run again?

    And don’t pull the “tradition” card this time; slavery, genocide and bigotry are all “traditions” in many parts of the world. Just being “traditional” doesn’t make something optimal or even right.

  6. Post office services, like fire department, telephone, and police, are at least partly public because private businesses tend to cherry-pick, meaning that certain people would get no service or only get it at great expense. The ideal, in fact, is a combination of private and public, giving people choice and engendering competition while still ensuring fair service availability.

  7. Old School Social Democrat, you are a tool. Japan Post is not a post office — it’s a financial institution.

    (Adamu also happens to be one of the foremost non-Japanese experts on Japan Post in his real life outside the blog, so he by no means has on “ideological blinkers”.)

  8. Wataru, I don’t understand your explanation of how private firms tend to cherry-pick. How is fully privatizing the post office going to hurt the consumer again?

    And while I personally am not a huge Koizumi fan (not nearly as much as Joe), I do find it impressive that he stayed on the bull for over 400 straight days.

  9. The government doesn’t make sure that people in urban areas get access to inexpensive vegetables. You can make an argument that they shouldn’t be making sure that people in the inaka get their mail service heavily subsidized either. Vegetables > Mail any way you look at it.

  10. Peter, obviously there are some services that are not commercially feasible to offer. Delivering the mail to remote parts of Japan, or stringing telephone lines to every inhabited part of the country, are among them. So these are offered as public or quasi-public services, because no private company is going to offer them at affordable rates. When NTT was privatized, the government still retained enough control to require basic services everywhere at fair rates. When Joe talks about post office services being commercial, and about well-run competitors being in “every sector,” I don’t think he is taking into account this aspect.

  11. If you really need to, you can maintain private service in remote areas with subsidies and regulation. The airline industry is a good example of this. In Japan, more remote prefectures and cities subsidize their air service, or even invest in airlines (e.g. JTA in Okinawa), in order to keep businesses in town. In the US, there is an entire federal program devoted to keeping tiny airports on the national grid.

    In the case of Japan Post, however, this doesn’t seem to be necessary since private delivery operators and ATM networks already serve every nook and cranny of the country, with the possible exception of the top of Mount Fuji.

  12. Sorry, guys, I don’t understand this bias toward private and against public. Do you want only private schools, only private fire services, only private ambulance services going after the lucrative business of cleaning up after your fatal auto accidents and murders? Do you want only private hospitals offering services to those willing to pay? Only private police protecting those who put up the money? What is so threatening to your worldview about putting post offices in every rural community?

  13. I personally agree with Adamu that postal delivery should remain a public service, and that the banking and insurance aspects don’t need to remain in the public sector. I don’t really get your leap from that sort of statement to wild accusations of Libertarianism run amok, though, Wataru. You’re the only person here to even mention education or emergency services.

    If it’s truly important to keep it public, wouldn’t it make sense to have it be truly publicly funded by taxes? Why should the taxpayer be on the hook for Kamei’s plans to keep all these things in the clutches of the government and still have to pay ¥80 to deliver a letter domestically in a relatively small country? The USPS can’t possibly be that much more efficient than its Japanese counterpart.

  14. Anywhere, here’s the answer to Adamu’s question. The current Diet session will not be extended. Edano has just informed Kamei of this decision, according to the Asahi online news. Kamei has threatened to leave the coalition, but I don’t think Kan et al. will really be all that sad to see him go. They are gambling on picking up their own majority instead of relying on a coalition. At the same time, they need those postal union votes, but they will probably get them by promising to pass the legislation in the next session, with or without Kamei.

  15. Wataru, I don’t think ANY of the writers on Mutantfrog are arguing for privatization of the postal service itself, only the financial corporations that are attached to it. You’re missing the basic point that this really has nothing to do with the post office itself, but the corporation known as Japan Post, of which the post office is actually a relatively small fraction.

    Personally, I would be in favor of completely severing the post office from the insurance and banking businesses, running the post office as a government service or non-profit government-owned corporation or whatever, and gradually winding down the government owned savings bank and perhaps insurance as well.

    The purpose of government institutions is to provide essential services to the entire population and the entire country that are not going to be provided at an affordable price by private enterprise. This includes things like postal and electronic communications to rural areas (since remote links are too expensive to be profitable), health insurance (since it’s obvious from examples such as the US that private health insurance cannot effectively cover the entire population without bias). And of course, as you mentioned, education and emergency services, as well as roads, mass transit, and various other services.

    However, the Japan Post bank is the largest bank in the world, which as we know has served the function over the years of funding the ministries’ huge shadow budgets through the issuance of bonds with weak public/legislative oversight. As I understand it this was the main reason for the privatization of Japan Post as a whole in the first place. Furthermore, I’m not aware of any market failure on the order of health insurance or postal delivery that necessitates a public savings bank. Private health insurance won’t cover everybody, private mail delivery may not go everyplace-likewise with private telecom networks, but have you ever heard of a privately owned savings bank refusing to open an ordinary deposit account for someone?

    I know very little about the insurance industry or market (remember we are NOT talking about health ‘insurance’ here) so I have no particular opinion on that subject. I’m sure there is some level of market failure in this sector, but I’m skeptical that it is of such an extent that government-run insurance, rather than some regulation, is necessary.

  16. @Joe: Perhaps more directly relevant to this discussion, but similar to the airport support program you mentioned, is the Universal Service Fund, which the FCC maintains in order to provide cheap telephone service to rural areas far below cost.

    http://en.wikipedia.org/wiki/Universal_Service_Fund

    The big debate in recent years has been over whether or not to extend the concept of universal service, perhaps through an extension of this same program, to also include broadband Internet access – which has arguably now reached the level of economic necessity that the ordinary telephone did decades ago, even for rural farmers and the like.

  17. Durf, but at least I didn’t mention “slavery, genocide and bigotry.”

    Well those are LDP policies anyway.

  18. Wataru, you have both a primitive understanding of Japan Post and a primitive understanding of privatization.

    First of all, Japan Post’s privatization actually has nothing to do with postal services — it has to do with the vast financial services arm of Japan Post. Privatization is about liberating the savings and life insurance from the pillaging bureaucrats and state actors that use it as a spending slush fund.

    Second, there is not one model of privatization where you suddenly sell off assets to private parties who only care about profit. I wonder what you thought about the privatization of Japan National Rail or NTT in the 1980s. You may note that rural communities continue to have working phone lines. Trains still run to most parts of Japan (although the most unused lines in the nether regions of Hokkaido were dismantled in the 1980s — BEFORE privatization).

    As it happens, there are many good arguments for privatization of the actual postal services as well. There are dozens of options with countless sub-options here. You could keep it a public corporation but outsource certain services, particularly the management. You could create private auditing and accounting to demand accountability. You could break them into regional corporations (the NTT and JR options).

  19. buuuuuuuuuuuuht the PNP is staying in the coalition.

    “Privatization is about liberating the savings and life insurance from the pillaging bureaucrats and state actors that use it as a spending slush fund.”

    No it isn’t. Those savings and life insurance holders were free to put their money elsewhere. That the bank offered better terms speaks to the status of its role as a “service.” I would like to think that competition in the private sector keeps interest rates for savings up, while keeping those for borrowing down, but I’m afraid it seldom works that way in the real world. It is also in the interest of private banks to foster a culture of credit.

    But yes, as to “socialized consumption” – the state encouraging consumers not to spend so it can spend on their behalf: If the problem is that the system is full of grifters, it is not apparent to me that privatization is the only option here. You don’t actually have to have a FILP-like fund in a public system, or if you do have one, you can provide better oversight.

    The main question about savings is whether Japan wants a bank where deposits are completely guaranteed (rather than just up to a certain limit that banks are ensured to) and the assurance that the banks will always accept the smaller deposits over household savers (which may be guaranteed by regulation, but often isn’t). The argument is that these factors plus the stability and convenience of postal savings schemes and a greater role for the state in things like savings education and a resistance to a culture of credit, drive up savings rates, which drives down state-borne welfare costs in the long run.

    By the way, the old canard about Japan having high savings rates was only really true when in comparison to the United States, not when it was compared to countries with similar schemes. It seems then that the other old canard – that Japan had a high rate of savings because welfare provision was so low – might have been putting the cart before the horse.

    Actually, Kamei’s position is not so old-fashioned any more. There are countries that have returned to postal savings after private actors have collapsed (Belgium) or after foreign interests have bought up all the financial institutions and started moving investment offshore (NZ).

  20. (rather than just up to a certain limit that banks are ensured to) = (rather than just up to the limit to which private banks are insured)

  21. Actually, Kamei’s decision to leave the coalition may well just be politics. He is the face of the PNP and probably wants to be out pressing the flesh for July.

  22. Curzon, you should try to break that habit of insulting people who comment on this site, like calling them a “tool” or “primitive”. I’ve been living in Japan since before you were born, and also spent 35 years in the US before that. I’ve experienced first hand the various stages both countries have gone through in their postal, financial, and other services.
    “You may note that rural communities continue to have working phone lines.”
    NTT has not been fully privatized, because it still has to operate under the NTT Law, which is why rural communities continue to have working phone lines, even those remote islands.
    Japan has adopted a blend of public and private control, which has proved far more effective in getting a high-speed Internet infrastructure in place than, say, the US scheme. Japan has more FTTH subscribers than any country in the world, thanks to a unique combination of private enterprise and government incentives.
    As for postal privatization, I actually have no strong feelings one way or the other, but I think Adamu went a bit far in his characterization of the postal bills. I do have strong feelings that financial services need to be much more tightly controlled, and that having at least some banks and insurance services that are operated along the lines of the traditional postal services is not a bad thing.

  23. “What is so threatening to your worldview about putting post offices in every rural community?”

    While this is mainly academic as the bank is the big deal, I simply feel that there are better potential uses for the government’s finite resources. This is frequently repeated and I think that there is more than a bit of wisdom in it – many aspects of the current Japanese system steal from the young and give to the old. I’m not calling for doing away with health services, but with some urban families apparently unable to feed their children and inadequate counseling and other services devoted to reducing Japan’s high suicide rate, I can’t see the wisdom in pushing for the cash outlays required to maintain post offices and equal postal services everywhere in the mainland. The government could still subsidize “vital” mail, roving city hall employees to facilitate certain procedures, etc. on a reasonable scale.

    The current system doesn’t guarantee equal service anyway. Okinawa takes longer to get mail. That’s logical. It makes sense that tiny dots in Tottori or Akita should have to wait a bit longer or pay a bit more for pickup/delivery as well.

    As I alluded to above, the government manifestly does not provide equal access to health services, police protection, and the necessities of daily life in every corner of Japan. Why are postal services so special? My concern here is also that a form of pastoral “Showa nostalgia” is distracting from reform of the post bank as many Japanese are talking about this in terms of mail / post service and that is one reason why it has proven to be decisive.

  24. Wataru, you being old doesn’t make you right.
    You making an appealing based on your age is even worse. It’s like an authority argument, based on… your own authority. hah.

    You writing lines and lines about the superiority of public service against capitalist greed blablabla when the issue here is not postal service to isolated communities but whether trillions of money are put into the market or are controlled by bureaucrats who use them discretionally.

    Socialism makes you stupid, no matter your age.

  25. Joe, I think there should be financial institutions of the old-fashioned kind, that make only conservative, safe investments. Such institutions, called “banks,” would not be allowed to make the kinds of nontransparent investments that led to the problems of countless financial firms in recent years. The same goes for insurance companies.
    On a related note, it’s insane that a company can go bankrupt not because it’s goods don’t sell profitably but because its completely unrelated investments went sour, as happened in Japan to Kyodaru, Americaya and others. Same for Orange County.
    spandrell, I have no idea why you say what you say, or the meaning or your words. Experience, in any case, is better than simple ideology. My actual views are complicated because of my experience.

  26. “And don’t pull the “tradition” card this time; slavery, genocide and bigotry are all “traditions” in many parts of the world. Just being “traditional” doesn’t make something optimal or even right.”

    Keee-rist. Make specious arguments much?

  27. Roy wrote : “The purpose of government institutions is to provide essential services to the entire population and the entire country that are not going to be provided at an affordable price by private enterprise.”

    You write as if your statement is self-evident but, depending on how you define your terms, it could produce a world with a huge state sector or hardly any at at all. Is it essential to have a public broadcaster like the BBC, a national theatre, or public libraries? How can we define “affordable price”? Almost all private goods and services are out of the reach of some segment of society. Also, is the government really obliged to provide all its services to the entire population, everywhere?

    Personally, I don’t believe in defining the scope of government in terms of what the private sector can’t, won’t or shouldn’t do. You often can’t make that judgement until a service is available. In principle anyway, I’m happy to have government ownership, not just regulation, of certain assets and services. It provides a route for benefits to accrue to the state and not just costs.

    I do think Japan Post should be broken up. I’d point out, though, that the form of privatization under discussion looked for all the world like it was going to give even more competitive power to its financial arms, particularly insurance, while removing resources from its postal services. Whether you regard the latter as a great shame or very necessary, that doesn’t seem to be the balance voters ever had in mind.

  28. “Just being “traditional” doesn’t make something optimal or even right.”

    Doesn’t that depend on your definition of “optimal” and “right.”

  29. “You write as if your statement is self-evident but, depending on how you define your terms, it could produce a world with a huge state sector or hardly any at at all. Is it essential to have a public broadcaster like the BBC, a national theatre, or public libraries?”

    Yeah, that’s definitely true, and I wouldn’t argue that there’s any objective measure by which you can make those distinctions. The line changes frequently depending on the society of a particular country, or over time. For example, if you look at my followup comment on the universal service fund, which was created for basic telephone service, but which may be extended to include broadband Internet access – and the equivalent to which already does include net access in some countries. I wouldn’t say that I particularly care whether any given service is provided by the public or private sector, but if it has been consistently failing in one or the other, then perhaps its time to try the alternative.

    “I’d point out, though, that the form of privatization under discussion looked for all the world like it was going to give even more competitive power to its financial arms, particularly insurance, while removing resources from its postal services.”
    That’s a good point. Arguably the privatization of the Postal bank and insurance firms are less important than their massive size; perhaps breaking them up into completely separate companies a la AT&T or Standard Oil would make more sense, or perhaps winding down the deposit bank by freezing the creation of new accounts and gradually phasing out deposits into existing ones, or something like that.

  30. LB: Fighting fire with fire. “Tradition” doesn’t support an argument any more than old age or similes to the Nazis.

    Wataru: OK, fine. But there is no such thing as a “safe investment” that produces a non-negligible return. Fee-free ATMs, credit card networks and deposit accounts earning more than 1% interest exist because banks are making unsafe investments at interest rates high enough to compensate for the unsafeness of those investments. Why do you think banks in Japan practically punched each other out of the way to get at sarakin companies over the last few years, and how do you think their retail cost structure has come down so much?

    If there is any problem with the current financial system, it is the lack of incentives for senior managers to think more than six months into the future of the company. This is as true for Japan Post as it is for Goldman Sachs, though for different reasons. Japan Post people (and most Japanese bankers) have jobs and pensions no matter what they do; Goldman Sachs people can cash out, retire and pick up a new career at any time.

  31. @Joe – pre-emptive strike, was it? Because you threw the first stone – arguments about “age” were not made until later, so you clearly were not responding to that, an no-one has mentioned the Nazis (aside from yourself, just now). “Fighting fire with fire” doesn’t work when you’re the one starting the fire. You quite clearly can make a coherent point, as you did just now to Wataru, so why come out blasting with hyperbole as a “counter” to an unmade argument?

    Anyway, as to PO privatization – privatizing the financial side, yes, the best argument (to me) being that the government is basically trying to use postal savings as a giant government piggy bank/slush fund. I am not a fan of privatizing the mail, though. It has been done, so there are prior examples readily available to see what happens when you do that. If someone can point out a good example, where service improved and rates at least stayed the same, please point it out. Because in any example I can think of the opposite happened – service was cut and rates went up, so users paid increasingly more for increasingly less. The success of the home delivery services like Yamato or Sagawa clearly shows there is room and demand for private-sector operators in the box delivery business, as UPS, FedEx and DHL showed overseas, but even then there are places that are not covered, or are covered but that incur incredibly heavy “special handling” fees.

    Sure, government subsidies could cover those costs and/or encourage private companies to service remote areas, but I don’t see how that is going to be an improvement over just running the mail as a public service in the first place.

  32. And Goldman Sachs et al show the potential downside to privatizing the world’s largest bank… Question: which has done more long-term damage to society/economy, Japan’s massively bloated public bank, or America’s massively corrupt private investment banks?

  33. “It makes sense that tiny dots in Tottori or Akita should have to wait a bit longer or pay a bit more for pickup/delivery as well.” While the first half of this sentence (wait a bit longer) makes sense in every practical sense, the second half is a matter of debate. If a country (whether you define that as the inhabitants or the government) decides that there is a benefit in maintaining non-centralized areas (e.g., the inaka) then there is a certain sense that the centralized areas (that section that generates most of the income, e.g., Tokyo & Osaka) should subsidize the non-centralized areas. To not subsidize services to outlying areas is to indirectly compel people, for financial reasons, to move to the center. That’s fine if that’s what you want. If, however, there is a benefit to maintaining some health in the inaka (possibly for things like food production for Kanto), then the subsidies make sense.

    And beyond the utilitarian view that it may just be in the core’s central interests, there’s also the ethical question about whether or not a country has a responsibility to maintain a certain lifestyle for all of its inhabitants. Obviously, these are both debatable points. But it isn’t something that is self evident or “just makes sense.”

  34. Considering the corrupt Wall St. banks most probably rip the faces off banks like Japan Post, I would go with the latter.

  35. @LB: That comment was in response to the first comment on this post from “Old School Social Democrat,” and I’ll stand by my view that whether or not something is “traditional” should have no impact on whether or not that thing is maintained. It’s a nice buzzword to win votes but it ultimately means nothing from an economic or even moral standpoint.

    @Roy: Very hard to say since so much of the effect is indirect. My bet is on the investment banks since they have much more global reach. That said, Japan’s finances seem to be more terminally screwed than most countries the US i-banks have touched.

  36. “some health in the inaka (possibly for things like food production for Kanto), then the subsidies make sense.”

    There are different inakas, however. I’m in one now – a city of about 500,000 in one of Japan’s less populous prefectures. There is a good argument that can be made for maintaining these (and their hinterlands) by any means necessary. Much of the “mail” side of the post debate, however, refers to the other inakas – the 3 house hamlets a half hour by car from the city of 25,000 that is a half hour from the Prefectural center. These require an entirely different line of argument. From the point of view of the sustainable inaka, the really small places (that at this point may not even be involved in agriculture) are a drain on local resources as well as central. I say “just makes sense” because these really small areas have already been written off when it comes to many services that are more essential than post – schools, access to emergency services, etc. It is, I would think, universally acknowledged that access to these services cannot be uniform nationwide and that at a certain point “good enough” logic has to come into play. I don’t see why this shouldn’t come into play for mail as well.

    Also, for what it’s worth I use “makes sense that” as roughly the same as “one could make the argument that” – not to suggest that the alternative makes no sense. Sense isn’t a zero sum game.

  37. I’ve already lost the page, but there was a link being passed around as a funny story about how an old lady out in the inaka died after falling into her traditional toilet (outhouse?). The thing that struck me about the story was that it apparently took 20 minutes for the emergency vehicle to be DISPATCHED after the son called 119 saying that his old mother was trapped. This sounds like it might be a good example of what M-Bone is talking about.

  38. Plenty of stories like that on local news in more remote prefectures. It might take an hour or more to get an ambulance, but they still get the mail on time.

  39. Digressing a bit, but my favorite Japanese TV show is にっぽん木造駅舎の旅 on BS1 — partly because I like trains, partly because there are no lame “talents” commenting on everything, and partly because each segment tells the story of how a once-mighty town or village in the sticks has ceased to be relevant in the modern world.

    One of the best segments was from a secluded corner of the Chugoku region (I think). There is a very old and very tiny wooden station there, basically big enough to keep a benchful of people under cover during a rainstorm, and now it is totally abandoned. It was purpose-built to carry local kids to a school farther down the line, but now there are no more local kids, so the station is not used at all.

    Anyway, that show is basically my mental image of the true inaka, though I reckon the really-true inaka is even worse since it has no train lines at all.

  40. It is possible to drive for an hour and not see another car in some of the ghostly backwoods in Chugoku. I’m not sure that this is possible even in Miyazaki / Oita / Kumamoto or in that part of Kagoshima south of the city itself.

  41. “my favorite Japanese TV show is にっぽん木造駅舎の旅 on BS1my favorite Japanese TV show is にっぽん木造駅舎の旅 on BS1”

    Yikes! The public broadcaster? Did your eyes bleed?

  42. “Adamu also happens to be one of the foremost non-Japanese experts on Japan Post in his real life outside the blog”

    Hi, I would be interested in reading more by Adamu on Japan Post. Can some links be supplied, please?

    Thanks

  43. I thought the whole beef with privatizing Japan Post had to do with who controls the trillion dollar pot of honey that are the Postal Deposits?

    Once those would be privatized, the runners of Japan Post couldn’t finance their friends and cronies like they’ve been doing for the last several decades. That’s why Koizumi went at them, and why they don’t like him to this day.

    Kamei is their boy.

    Credit is power. So if the loanable money sitting in Japan Post is controlled by private companies, it changes the whole calculus of who can get loans throughout Japan. And obviously, ideas of dubious profitability would probably not get approved.

  44. Curzon and Hoofin – you guys are correct about the best reason to privatize and the reason why it was broached originally. However, the postal service discussion is still very relevant because it has always been the most important part of the debate for most Japanese and the main reason why it is a hot button issue. A 2005 cabinet poll saw the breakdown as roughly 50% support, 30% oppose, 20% undecided. The top reason for support of privatization was “better service, less feeling that you are dealing with ‘officialdom'” (with concern over funds was fourth at about 20%, respondents could pick multiple answers). Over 70% of those opposed were concerned about “fair” service to remote areas. This is one reason why I think they should just privatize the damn thing – what looks to be the most important part of the debate (the money) has been sidelined in the public sphere by the “lifestyle” concerns with tend to dominate Japanese voter behavior.

  45. Incidentally, numbers that I have seen also suggest that a major reason why people like using the postal bank and insurance is the idea that the government “guarantees” their money.

  46. @curz and hoofin

    Yes, but if that is the justification, then why not just have better regulation/oversight instead of privatizing?

  47. Playing devil’s advocate for a moment, we should remember that the private sector isnt necessarily any better than the public. There are plenty of examples where dubious issues come into play in the private sector too. We should remember not to naively suggest that the private is better than public because theory says so.

  48. Fat Tony: The reason, I thought, would be obvious.

    Japan Post takes in as deposits hordes of money — cosmically enormous hordes of money — and will use most of that for investment.

    So long as the government has influence in the decision-making process of where that money is invested, those investments will be subject to government interference, and thus distort the market. Whether this government influence come through the postal office is an agency of the government, or as a public corporation, or as an independent corporation subject to auditors appointed by the government, government interference will be influence the decisions.

    Privatization is the only way to remove that direct government interference, and introduce decisions that will more likely be based on what will bring the safest/greatest return on investment.

  49. I don’t have any problem with a quasi-public outfit deciding who benefits from Postal Deposits. The difficulty I have is when these deposits are directed to politically-connected people.

    Given the fact that Japan runs huge deficits and has to borrow, the idea of Postal Deposits might just be an illusion anyway. if the Japanese government wanted to close the gap, they’d have to raise taxes. And the money would inevitably come from Postal Deposits. This of course means that the government might have to confiscate the Postal Deposits via the tax system. So the money will end up being spent in a non- “market efficient” manner anyhow.

    But I think Japan would be better off if the tax method were used, rather than this crony capitalism. Because at least if the government raises taxes and spends the money, there is an open vote and a bit of sunshine. When country barons who are well connected to political officials get to decide, there really isn’t any public check on that power.

    I’m glad the United States government is just going broke the straight way, without these depository shell games. It will be much easier to introduce a 4% inflation in America than it will be in Japan.

  50. “and introduce decisions that will more likely be based on what will bring the safest/greatest return on investment.”

    The decisions based on what the greatest perceived return on investment will be, perhaps. But safest? It is hard to say that after the events of the past few years. In fact, as we all know, the market tends to regard “safety” and “high returns” as polar opposites. And governments have a say where private capital goes anyway. That’s what regulation of the financial sector is.

    The real question to me is whether the Japanese people want a banking system where Mum and Dad can place their small deposits into an institution where they know they will be totally guaranteed by the state, and whether there is a state institution to deal with market failure, seen, for example, in the form of interest-rate gouging for credit card use.

    Other countries have managed to maintain public post-bank services and keep the funds out of the hands of politicians, while providing a decent return on investment and low rates for small businesses and individuals that are likely to borrow. Others have gone back to such a system after completely eliminating their public post bank services, because privatization was such a disaster (Belgium is the prime example). Nevertheless they have managed to regulate so that people’s savings do not turn into a slush fund for bureaucrats and politicians.

    Why can’t Japan do the same?

  51. Curzon: “Privatization is the only way to remove that direct government interference, and introduce decisions that will more likely be based on what will bring the safest/greatest return on investment.”
    A wonderful example of thinking guided purely by ideology, without regard for what actually happens in the real world, where we have “inteference” not by government but by today’s version of private enterprise robber barons. Have you not been paying attention to what the private sector has been doing with people’s investments lately?

  52. Just a thought – much of the enormous hunk of postal savings gets invested in Japanese government bonds, right? One result is that the Japanese government does not have to borrow from abroad (an often cited strategic advantage) and pays comparatively little interest on its debt (according to Katz in the Oriental Economist, Japan pays far less servicing its debt than the US – that notable article last year also ran a bunch of other surprisingly hopeful figures – half of Japan’s debt is held by branches of government itself and presumably counts as debts and assets at the same time, the “national debt” includes all prefectural debts – US states, for example, have a over a trillion dollars of debt that are not counted in the national debt; if you disregard the 50% of debt supposed to be held by the parts of the Japanese government itself, they are holding US securities amounting to something like 20% of the remaining debt figure which earn more interest than the equivalent piece of Japanese debt).

    You can argue that this promotes irresponsible spending by the government, etc. but in a variety of polls, Japanese people demand that the government support their “seikatsu” over everything else (polling close to Northern Europe in key areas) so the state of postal savings may make sense, given what Japanese people say they want.

  53. “Incidentally, numbers that I have seen also suggest that a major reason why people like using the postal bank and insurance is the idea that the government “guarantees” their money.”

    In the US we have the FDIC, which doesn’t guarantee all deposits, but does guarantee more than enough for the vast majority of people. Do other countries have a similar system of mandatory, government backed, deposit insurance? I really have no idea.

  54. I didn’t know that Japanese prefectural debt is considered national debt, while that of US states isn’t, but it makes sense on some level. After all, Japanese prefectures are merely administrative areas of the central government, created for reasons of convenience, whereas US States are, well, United States – sovereign entities that chose to associate. While the Federal Government is generally expected to fund States that get into financial trouble, I believe they are under no legal obligation to do so (although I certainly could be wrong, I have never checked.) Incidentally, the assumption of all of the States’ war debt from the Revolutionary War was one of the main tactics used to build the power of the federal government in the early days.

    It certainly is true that the main purpose of JP issuing bonds at all is to fund the Japanese national debt, which is what led to the whole slush fund/privatization debate in the first place. I am curious now, though, how much, of JP’s debt is held by private investors, and/ or other governments. I imagine that the insanely low interest rate has little appeal, but it is also likely a major to invest in the Japanese currency, which has been very stable over the past 20 years or so.

  55. I didn’t know that Japanese prefectural debt is considered national debt, while that of US states isn’t, but it makes sense on some level. After all, Japanese prefectures are merely administrative areas of the central government, created for reasons of convenience, whereas US States are, well, United States – sovereign entities that chose to associate. While the Federal Government is generally expected to fund States that get into financial trouble, I believe they are under no legal obligation to do so (although I certainly could be wrong, I have never checked.) Incidentally, the assumption of all of the States’ war debt from the Revolutionary War was one of the main tactics used to build the power of the federal government in the early days.

    It certainly is true that the main purpose of JP issuing bonds at all is to fund the Japanese national debt, which is what led to the whole slush fund/privatization debate in the first place. I am curious now, though, how much, of JP’s debt is held by private investors, and/ or other governments. I imagine that the insanely low interest rate has little appeal, but it is also likely a major to invest in the Japanese currency, which has been very stable over the past 20 years or so.

    BTW, how long has it been that the BOJ exchange rate has been virtually 0%?

  56. I didn’t know that Japanese prefectural debt is considered national debt, while that of US states isn’t, but it makes sense on some level. After all, Japanese prefectures are merely administrative areas of the central government, created for reasons of convenience, whereas US States are, well, United States – sovereign entities that chose to associate. While the Federal Government is generally expected to fund States that get into financial trouble, I believe they are under no legal obligation to do so (although I certainly could be wrong, I have never checked.) Incidentally, the assumption of all of the States’ war debt from the Revolutionary War was one of the main tactics used to build the power of the federal government in the early days.

  57. Japan also has government-mandated deposit insurance on bank accounts through the Deposit Insurance Corporation (預金保険機構), so a personal account at pretty much any Japanese bank is just as safe as a JP account. The limit is 10 million yen, but if you want to protect more cash than that you can split it across multiple banks.

    The only banks where you don’t get DIC protection are Japan Post and certain foreign banks such as HSBC (but Citi, Shinsei, Aozora and Tokyo Star are all OK).

  58. So Japan Post isn’t in DIC because they are, ironically, the only non-insured deposits, or because they are guaranteed through a different program or regulation?

  59. Roy, “target rate” you mean (it’s really something like the upper limit on the overnight unsecured call rate, but unless you’re on the phone to the BOJ, that doesn’t mean much.)

    The graph of it looks funny. Like an ER patient, flatlining in 1998-99, then someone shocked a heartbeat into it with a defibrillator for the first half of 2000, but then it goes back to flatlining again from August 2000 to mid-2006 (second try with the paddles). Shocked back up again, and now down to a resting heartbeat at a rate that insures that depositors still get very little or negative return…

    So to answer your question, it has been close to zero off and on for more than ten years on now.

  60. Rates on cash (demand deposits) have been close to zero in Japan for at least ten years. But why should that be surprising? There is no inflation, and in fact, a bit of deflation.

    Getting a return on your money suggests that the bank has to loan it out at some risk. The borrower should have some investment that they believe will either offer a return, or allow them to use an asset on credit (like a house) which they will inevitably own.

    So if someone wants to lock their money up for a term, I can see that they should get interest. But why should a demand depositor get interest? They can withdraw their cash at a moment’s notice. So the only fair rate they should get is the inflation rate, plus the tax effect. If inflation is zero, that return is zero.

    I agree with M-Bone that the 200% of GDP debt number that is thrown around is a bit of a red herring, since there’s also an 80% “net” number out there (implying that a lot of the Japanese government debt is simply cross-holdings between government entities. I don’t know if the asset portion gets a greater return than what JGB’s pay out in coupon interest.) The Post Office probably holds the bulk of the net 80%.

    Since the government does not collect sufficient taxes, they are basically letting the public keep the tax money and deposit it in Post Office. And so, in a macroeconomic sense, this is also a “net” number.

    People here feel richer than they actually are, because if the J-government ever wanted to reduce the debt, they would have to raise taxes to do it. People who had deposits would then go to the Post Office and ask for their money, which the Post Office would raise by selling JGBs. The buyer (or lender) of last resort would be the Bank of Japan. The Bank of Japan’s holdings would then be redeemed by the new tax money collected by the government.

    Most Japanese accounting is a vast shell game that leaves U.S. antics in the dust. This keeps powerful backroom people who control the levers in power. I think Mr. Kamei wants that kind of system, and Mr. Kan hopes to unwind it.

  61. “So if someone wants to lock their money up for a term, I can see that they should get interest. But why should a demand depositor get interest? They can withdraw their cash at a moment’s notice. So the only fair rate they should get is the inflation rate, plus the tax effect. If inflation is zero, that return is zero.”

    A demand depositor should earn only the rate of inflation for their money, and the reason is because they have access to withdraw their money at any time? You sure about that, Hoofin?

  62. On DIC:

    I knew it existed in Japan, but I imagine 10 million yen ain’t much for a lot of seniors in Japan who still see themselves as ‘middle class.’

    “Mr. Kan hopes to unwind it.”

    Do we know that yet?

  63. The post office didn’t become a deposit-taking behemoth because of deposit insurance. A more important incentive was tax exempt accounts like maruyu (マル優) which started in the sixties. There were limits to how much was exempt but it was very easy for people to open multiple accounts at the post office and evade taxes. I recall reading somewhere that there were more individual post office maruyu accounts than the population of Japan. The system was largely abolished in 1988 but it remains in part and a major criticism of Japan Post was that it was still failing to administer such accounts properly years afterwards.

    That reminds me, Roy asked earlier “Have you ever heard of a privately owned savings bank refusing to open an ordinary deposit account for someone?” Yes, and I’m not thinking about foreigners. Most industrialized nations have an underclass which is not served by major financial institutions and Japan is no different. They are actually getting more restrictive again under the guise of enforcing anti-money laundering and anti-gang legislation.

  64. I imagine 10 million yen ain’t much for a lot of seniors in Japan who still see themselves as ‘middle class.’

    If you have more than 10 million yen in cash, you are probably not managing your finances very well to begin with.

  65. If you have more than 10 million yen in cash, you are probably not managing your finances very well to begin with.

    Exactly. You should put it into stocks, so that experienced private-sector managers can selflessly protect and guard your money while making sure the investments accumulate interest and grow…

    Oh, wait a minnit’…

  66. “I didn’t know that Japanese prefectural debt is considered national debt, while that of US states isn’t, but it makes sense on some level.”

    It makes sense given how the two countries are set up. It also raises the scary possibility that the US could be “fine” in terms of its debt, but see so many states go bankrupt (ie. California… and I hear NJ isn’t doing that well either) that a great portion of the population winds up with significantly diminished services.

    BTW, I’m not sure about this but I’m assuming that the Japanese “national” debt also includes MUNICIPAL debts.

    “Since the government does not collect sufficient taxes, they are basically letting the public keep the tax money and deposit it in Post Office.”

    Yeah, this is something that doesn’t get discussed that much either – Japan is running a Canada/Europe style of welfare state with a fraction of the sales tax and considerably less income tax for many solid earners.

    “I agree with M-Bone”

    I wish I could take credit for Katz’s article – seldom have I read something that left me thinking “holy #&#% why isn’t everyone talking about this!?” so strongly.

    “If you have more than 10 million yen in cash, you are probably not managing your finances very well to begin with.”

    Here’s another dirty (not so) secret of the Japanese economy – all of those mattresses with 10 million yen in cash stuffed in them.

  67. Exactly. You should put it into stocks

    Well, that’s not exactly what I had in mind — an individual with that much money could at least buy JGBs directly and get a slightly greater pittance of interest, with still virtually no risk of default so long as Japan keeps printing its own money.

  68. n individual with that much money could at least buy JGBs directly

    One problem might be that they have to worry about “duration”, a technical bond term if they hold anything for term, and that’s why cash might be a better choice.

    If someone even buys 2-year Japan Government note, there is the possibility that rates move against them and they have to take a reduced principal price in order to make the sale. (If a note is paying 0.75% interest and rates go to 0.90%, the new buyer will want a discount on the price.)

    Stocks do not have any maturity or guarantee of principal at maturity. That might be a possible investment choice, but certainly not a good savings choice.

  69. Stocks are not a good savings choice, I think we all agree on that. However, what is the worry concerning ‘duration’?

    Price and yield move in opposite directions, yes, but unless we’re talking about people actually trading the bonds they buy (more power to them if they want to go in that direction), why would they care if prices moved against them? A lot of individual investors would just wait for the principal to come back in two years and then buy another two year JGB, to ladder the investment further out.

    The point is less the instrument, but the fact that sitting on a mountain of cash won’t get anyone anywhere. You already implied with a previous comment that money left in a demand deposit account is essential going to ignore the time value of money. So choose anything with fixed income payments over time and you should be doing better…

  70. @Curzon: This comment is coming a bit late, but I think “hordes of money” doesn’t work as an expression as a horde designates a large group of people.

  71. Which is why I said “at least.” There are many happy mediums on the risk/return axis between Japan Post Bank and BP stock.

    This discussion is getting a bit off-topic, though. The point is that cash deposits in banks are generally safe from individual bank failures unless the depositor has too much cash to begin with, and even then the problem can be mitigated by using multiple bank accounts. There is really no need for a state-run savings entity when private entities offer the same sort of protection with a government guarantee AND have slightly greater incentives to invest the savings in a sensible manner rather than simply plowing the money back into the government’s budget. (Though many private institutions also buy huge amounts of JGBs.)

  72. @François

    You are right. “Scads” is a better word. Horde does make one think about “hoard”, which is what the government seems to be doing with the money.

  73. What I don’t understand is that if the Kan Government feels that overall debt is the problem that is holding the Japanese economy back, why they don’t just net out the cross-holdings, and raise taxes sufficiently to obviate the need for JGB issuance.

    Just unwind everything, right? Then, everyone is poorer on paper, but there is no debt overhang. Even Kamei’s people should be happy about the reduced debt, although they would lose a raison d’etre with the Postal Bank.

    That’s what I say about how Japanese accounting is a real Rube Goldberg diagram.

  74. “I knew it existed in Japan, but I imagine 10 million yen ain’t much for a lot of seniors in Japan who still see themselves as ‘middle class.’”

    The FDIC in the US insures $250,000 per customer per bank, right?

  75. @M-Bone: Could you supply a link to the great article by Richard Katz, please? Even if it’s a paid one, please provide link, and maybe I can find a way to purchase it. For example, through a paid pdf, such as those offered by Foreign Affairs site.

    Thanks

  76. “The FDIC in the US insures $250,000 per customer per bank, right?”

    That’s right. By the way, for all you US citizens reading, remember to turn in your FBAR by the end of this month. Declare, declare, declare…

  77. “If you have more than 10 million yen in cash, you are probably not managing your finances very well to begin with.”

    I don’t know about that. Many people are cautious about putting their cash in shares or investment companies. With good reason too, as not everyone works at a bank or otherwise has the time to be completely financially literate. Even if those who are pretty good with their money in some areas (small business, small-scale property investment), may not understand the stock market. Some people just want to play it safe. And they also probably want neither the inconvenience of having multiple bank accounts, nor the hassle of some young bank clerk who knows it all trying to push investments or credit cards on them. Bottom line, there are a large number of people who are actually happy to just earn their money, who would rather stay out of the global casino, and who don’t know and don’t care what a bond is.

  78. Roy, many countries have similar deposit insurance systems in place. There is a fairly current list here if you’re interested. I think that it is common to limit the amount insured per customer to one account at one bank to prevent moral hazard. But, following the most recent global crisis many Asian countries temporarily imposed blanket guarantees on deposit accounts to prevent bank runs (an unecessary step perhaps, but who wants to take chances, right?).

  79. I never knew that the US had deposit insurance schemes other than the FDIC!

  80. I think this comments thread makes a good case for more short posts that highlight things rather than offering detailed coverage.

  81. Fat Tony,

    You’ve only given excuses for not managing finances well. Some folks do like the simplicity of knowing (thinking) that they’re money is safe down the road at the post office. But if you measure with the opportunity cost of holding an entire portfolio in cash when the value that people place on that convenience is surprisingly high.

    I’m reminded of that scene in Luc Besson’s “Leon” where Danny Aiello says that he’s like a bank, but better than a bank, when he’s just holding the money and “keeping it safe”.

  82. M-Bone,

    The Katz article is informative, but ironically dated:

    Net debt, absent the double counting, is about 100% of GDP. That’s about the same ratio that Italy, *Greece* and Belgium have sustained for much of the past two decades-without setting off financial crises.

    The rest is hard to argue with, including:

    “By lowering the hurdle rate for investment, [keeping long-term rates very low] leads firms to pour capital into wasteful projects that temporarily boost demand but end up hurting long-term growth.”

  83. Indeed. But the important point is that the net debt is starting to look more like everywhere else in the developed world than say, Zimbabwe. I think that just about every developed country is going to up around 1:1 debt to GDP ratio before they’re finished buying themselves out of the great recession (I’ve seen projections that the US will hit 100% in 2011, but there are different numbers floating around that measure different things).

    There is also the matter of interest – the reason Greece was so terminally screwed is that it was paying 4-5 times more interest on its debt than Japan. Still, Katz throwing Greece in there looks pretty funny now.

    In any case, I think Japan is laughing by issuing bonds at lower interest rates and holding $800 plus billion in American bonds that pay a higher rate. I wish I could get in on a scam like that….

  84. Scam? In a way, but then again that’s the essence of the famed “yen carry trade”. In its hey day, there were folks taking out mortgages with Japanese banks, converting to either dollars or South African Rand or kiwi dollars, or whatever, and then buying long-term government debt. Pray that currency rates don’t move against you, unwind the transaction when the bond matures, and buy yourself a new Volvo with the net profit.

    Repeat as necessary…

    If I had 10 million yen sitting in a Japan Post TEIGAKU account, I’d try and get in on the scam for sure.

  85. Wow I missed a lot of discussion here. I wouldn’t call myself an expert necessarily – I don’t have anything published. I have just done some translation work on the subject.

    Saru is right to mention that that the “proper” role of banks is not necessarily set in stone, and there seems to be a government on all sorts of investments these days. Still, there are some good reasons to shrink Japan Post’s savings operations, financial crisis notwithstanding. For one thing, the organization has no idea what to do with the money. Their money managers are simply not trained to do what normal banks do. Until 10 years ago, the deposits were automatically placed in an account in the foreign ministry. In exchange, postal savings automatically received a slight interest premium vs. government bonds. The MOF, in turn, used those funds as a second budget to facilitate creating the massive public works-industrial-complex we know today.

    That system was reformed to make Japan Post more like a real bank, and now Japan Post’s investments are clearly accounted for – they shifted from a special account at MOF to buying government bonds from the same ministry.

    So that brings us to another risk – any institution that is completely invested in one thing is exposed to all the risks contained therein. So if Japan fails to get its fiscal house in order, the value of those bonds will plummet and could seriously damage Japan Post’s financial position. There are some like Kamei and the rest of the PNP who have no problem insisting that Japan Post continue being the go-to buyer of Japanese government bonds, but those with cooler heads see how unsustainable the situation is.

  86. “the opportunity cost of holding an entire portfolio in cash when the value that people place on that convenience is surprisingly high.”

    And you, my dear, can only claim with any confidence that it is an opportunity cost if you are offered a guaranteed return elsewhere. Some people have an aversion to risk when it comes to giving their money to other people to play around with. I’m probably one of them. But so are some of the richest folks I know.

    Anyway, if people like this who believe they know everything about global finance can’t turn a quick buck,

    http://www.nytimes.com/1995/03/01/opinion/foreign-affairs-the-global-casino.html

    then your humble political scientist has no chance.

  87. Until 10 years ago, the deposits were automatically placed in an account in the foreign ministry.

    Adamu, that’s got to be finance ministry, ne?

    I never considered what happens to the solvency of Japan Post if interest rates spike up. (Bond price goes down.) But on the other hand, a bank traditionally “holds to maturity”, and do therefore they should be able to price at something other than market price.

    All banks everywhere are, by definition, “insolvent” if the test is a mark-to-market or a fire sale. That was the critical failure in explaining TARP to the U.S. public. The Bush Administration didn’t want to say, “a bank by its very nature is insolvent if you use mark-to-market accounting.” Probably also why, as Adamu says, the Japanese don’t talk very much about what happens to J-Post holdings in the event of a sudden rise in JGB rates . . .

  88. @Hoofin: I don’t agree with that statement. Banks are legally required to have a LOT of paid-in capital from shareholders as a buffer against losses on investments. Then the banks take deposits at low interest rates, and reinvest that money at higher (often multiples higher) interest rates, pocketing the difference as retained earnings or paying it out to shareholders. The only way a bank could become insolvent, even if required to mark all of their investments to market, is by losing enough asset value or having high enough operating expenses to eat through all of this paid-in capital *and* all of the accumulated interest in excess of what lowly depositors get. It’s possible, but by no means automatic. So I don’t see how you consider banks to be insolvent by definition under MTM standards.

  89. Fat Tony,

    The only reason the money is in the bank in the first place is that the perceived opportunity cost of holding it in your dresser drawer is too high. So I trust folks no matter how risk averse are not having trouble with the concept of an opportunity cost. Furthermore, I am not advising that the bumpkins of Japan try their hand in “the global casino” as you repeatedly put it. The point is, though, that they can in many ways achieve a higher return for around the same level of risk.

    (What should be added here is that there are a lot of risk-averse folk who know what a bond is and invest quite effectively in either JGBs or bond funds, and I assume that this crowd is not mutually exclusive with the gazillions of folks who have a Japan Post bank account. This is less point and counterpoint than my own personal disclaimer for statements that appear to paint account holders with a broad brush.)

    Hoofin,

    This is true. What I was surprised to know, however, is that the Tier I capital ratio of Japan Post Bank is 92%. Other institutions that the government partly owns don’t fare quite as well, he he.

  90. @Joe Jones: you say So I don’t see how you consider banks to be insolvent by definition under MTM standards.

    This is easier to show geometrically, but I forget where I did it on my blog. The basic idea though, is that the asset (loan the bank has out) may be booked at 100. Where did this 100 come from? It is usually about 90 of depositor money and 10 of shareholder/owner capital.

    Subtract the bank’s own cash holdings, and addback whatever it has booked as “reserve” (meaning a write down in advance of time on a possible loan loss), and most of the bank’s holdings can be analyzed this way. The loan is booked at 100, (Of course any securities investment (held to maturity) should be treated as if purchase price were indexed at 100. But that just complicates the model.)

    Now, if in the ordinary course of business the bank is forced to sell its loan portfolio (fire sale) OR it has to mark-to-market securities that are intended to be held to maturity, it could easily wipe 10 off the 100 price and be left with 90. At a fire sale, a buyer will obviously want at least a 10% disocunt. And in mark-to-market, loan prices can swing 10% just in the normal fluctuation of interest rates throughout the year. A flash pricing of a bank, finding markets for loan portfolios, etc., will lead to an unpleasant situation even in good times.

    So if anyone tries to take apart a bank at any given moment, it would in all likelihood be insolvent (meaning, value of assets less than value of liabilities). I want to contrast bankruptcy and insolvency: bankruptcy as a declaration in court of insolvency, and insolvency as the excess of liabilities over assets. (Many Americans, and especially many young people, are insolvent but not bankrupt.)

    Joe, you are entirely right, that with a capital cushion and with the spread (the excess of what depositors are paid over what the bank earns in interest), the bank can just keep going and going. My point is that a moment’s snapshot of a bank, or the antics that went on about “nationalization of the banking industry” in February 2009 courtesy of Roubini, et al., will always lead to trouble for banks. The bank is converting demand notes into long-term financing for borrowers. It is a hold-to-maturity operation. (On specific topic: the JGB holdings of Japan Post are presumably long-term holdings in the sense that the government expects a Japan Post financing facility to continue indefinitely.)

    Banks are a trust business, and always have survived on the trust of both depositors AND shareholders/owners.

  91. @Peter: This is true. What I was surprised to know, however, is that the Tier I capital ratio of Japan Post Bank is 92%. Other institutions that the government partly owns don’t fare quite as well, he he.

    Wow! 92%. So they have 92 yen in qualified capital for every 100 yen in loans out? I don’t know exactly how Tier I is calculated to its last detail, but it sounds like any JGB holdings don’t have to have enterprise capital held against them. So Japan Post only needs to have capital backing loans to things other than the government . . .

  92. @ Hoofin: I was surprised about the 92% Tier I ratio myself so I did a little digging around in Japan Post Bank’s 2009 annual report (pgs. 107-111 if anyone else is interested).

    Japan Post Bank uses the Basel II framework to calculate their capital adequacy requirements, which means they set capital aside for credit risk and operational risk. You are correct about the bank not needing to set aside capital for “loans” to the Japanese government. JGBs account for around 80% of the bank’s total assets (loans only make up around 2%) according to its balance sheet, and these securities are rated by credit ratings agencies such that the standardized approach for credit risk assigns them 0% risk weights. That means that they don’t figure into the capital adequacy calculation at all. According to the annual report, the biggest contributors to the capital requirement for credit risk are: (i) corporate exposure, which makes up 46% of the capital requirement; (ii) investments in capital, which accounts for 20%; and (iii) exposure to financial institutions, which accounts for 17%. The annual report shows that the risk weights for each of these asset categories ranges from 20-100% for financial institutions and corporations, and is set at 100% for investments in capital. The bank also has some requirements for off-balance sheet items as well, but this is minimal, and the on-balance sheet exposure accounts for most of the JPY219 billion of capital the bank is required to set aside for credit risk. (To arrive at that figure, the bank took $% of its total risk weighted assets. I think this is because they are not internationally active, so under Basel II, they only have to set aside 4% of risk weighted assets rather than 8%.)

    I am less familiar with the calculation of the capital requirement to cover operational risk, but the way I understand it from reading the Basel II revised framework document is that under the basic indicator approach for operational risk, the bank needs to set aside capital based on a fixed percentage of the average of annual gross income over the past three years. If anyone knows more about the calculation for op risk, I’d be interested in hearing about it. At any rate, in 2009 the bank was required to set aside a total of JPY134.9 billion in capital to cover its credit and operational risk (It happens to have set aside far more than that – see below).

    The calculation of the Tier 1 capital adequacy ratio is also broken down in the annual report (pg. 107). This is the bank’s total tier 1 capital divided by its risk weighted assets. The risk assets are tied back to the capital requirements above and include the weighted assets themselves and an equivalent charge to account for operational risk. Since the bank took only 4% of on-balance sheet risk weighted assets, multiply this figure by 25 and you get JPY5.4 trillion. Off-balance sheet risk weighted assets come to JPY74.4 billion. The operational risk equivalency charge totals JPY3.4 trillion (again, I’m not so clear on op risk calculations, so I’m pulling this straight from the annual report). That makes for a total of JPY8.85 trillion in risk weighted assets. Total Tier 1 capital is JPY8.15 trillion, so 8.15/8.85 = .92, or 92%.

  93. One thing I forgot to do in my last comment is to use a data point to reinforce something that Adamu mentioned in an earlier comment:

    that brings us to another risk – any institution that is completely invested in one thing is exposed to all the risks contained therein. So if Japan fails to get its fiscal house in order, the value of those bonds will plummet and could seriously damage Japan Post’s financial position.

    As I noted, one reason Japan Post Bank’s capital ratio is so high is due to the extremely high concentration of JGBs on its balance sheet (again, JGBs are 80% of total assets). This may not be a fair comparison, but I just took a quick look at a few other Japanese banks to see what their asset allocations look like. For 2009, MUFG had 24% of its assets in securities compared with 46% in loans. Shizuoka Bank had around 26% of its assets in securities, and nearly 70% in loans. Sure, that’s only two institutions and hardly representative of the entire sector. But from these numbers, it is clear that Japan Post Bank is not functioning like a normal commercial bank. Instead, as has already been pointed out here numerous times, it is functioning as a massive buyer of JGBs , helping to finance the government’s debt. And given that it has relied so heavily on investments in risk-free JGBs, I second another point raised by Adamu, which is that Japan Post Bank very likely lacks the sophistication and risk management skills to diversify its investment portfolio.

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