The Privatization of the Postal Businesses Must Not be Halted
The need for debate from a popular perspective -
July 15, 2005
The bill for the privatization of the three postal businesses, once positioned as the crowning glory of the Koizumi administration's structural reforms, is in danger of being defeated. The risk should be taken seriously not only because the defeat of the bill would immediately make the Koizumi administration a lame duck, but also because it might even bring to a halt the program of structural reform that the government is pursuing with a view to the full-scale regeneration of the Japanese economy. In its capacity as a private-sector think-tank, JRI makes the following urgent proposals in support of the privatization of the postal businesses.
The debate in the House of Representatives has barely scratched the surface, beginning and ending with the issue of why privatization should be necessary. The positions of the government, which emphasizes the advantages of privatization, and those opposed to privatization, who loudly emphasize its disadvantages (there are fears that the level of service provided to local communities may fall as a result of the closure of branches, among other factors) have not moved any closer together and the debate has, unfortunately, gone no deeper.
Objectively, it is extremely difficult to predict with any accuracy the shape of the three postal businesses in 10 years' time if they are privatized, but surely the issue that should be discussed in earnest is what the latent risks to the Japanese economy and even to the people of Japan may be if the postal businesses are not privatized. If people in every sector of Japanese society are able to share an accurate perception of the issues at stake, it will be possible to pursue a debate that goes beyond simple advocacy of and opposition to privatization itself with a deeper and more positive discussion of how "good privatization" can be achieved.
The "latent risks" if privatization does not go ahead can be summarized as follows:
(1) The continued existence of a vast government finance = postal services/fiscal investment and loans system will be an obstacle to the effective investment of financial assets held by individuals through market mechanisms. At a time when Japan is experiencing population decline and population aging at a pace unparalleled among the developed nations, this will present a major hindrance to the regeneration of the Japanese economy in the sense that financial services sector will not be able to fulfill its proper role, namely channeling funds into new industries that are expected to achieve rapid growth in the future, with a view to preventing a fall in the latent economic growth rate as the labor force declines. Privatization is essential if Japan's financial systems are to be strengthened and structural reform with a view to encouraging a flow of funds from savings to investment is to be promoted.
(2) Around 80% of postal savings and postal insurance funds are invested in two areas — government bonds (¥163 trillion, 48% of the whole) and fiscal investment & loans/special corporations, etc. (¥105 trillion, 31%). In practice, the Postal Services Public Corporation provides financing functions for the central government and for government corporations such as FIL institutions, special corporations and government financial institutions. A particular cause for concern is the fact that special corporations and government financial institutions are encumbered with huge "contingent liability risks" — risks, attendant on bankruptcy or excessive debt, that represent a latent burden on the people of Japan. At present, these risks are being kept under control by historic low interest rates and the policy of extreme quantitative monetary easing, but when interest rates rise in the future, the likelihood that the risk will become a reality is by no means slight.
(3) Future rises in interest rates also greatly increase the risk attendant on the operation of postal savings themselves. The product characteristics of fixed postal deposits — six-month compound interest and surrender at any time without penalty — constitute a risk that the private sector cannot accept. Past experience clearly shows that when interest rates are rising, the tendency for subscribers to switch to higher fixed deposits grows, leading to a short-term rise in interest on fund procurement, and because yield on investment does not change easily in the short term, this leads to negative margins and sizeable losses. Besides enhancing freedom of management, the privatization of the postal businesses will make it possible to correct the balance of the investment portfolio, which is biased in favor of government bonds, and should make it possible to respond in dynamic fashion to future changes in monetary conditions, such as a rise in the level of interest rates.
Another question overlooked in the course of discussion in the Diet is that of for whom privatization is being undertaken. The discussion of whether privatization will be good or bad for "the people" does not accurately address the essence of the problem. Strictly speaking, the term "the people" covers two viewpoints, that of the "user" of postal services and that of the "taxpayer", who must bear the cost, and these two need to be discussed separately. From the user's point of view, it is certainly hard to see the need for privatization in that that the postal services provide a low-cost universal service even in sparsely populated areas. However, it should not be forgotten that, from the taxpayer's point of view, the cost of providing these services (the cost of the portion exempt from tax and deposit insurance premiums) is an "invisible national burden" amounting to ¥1 trillion a year. Furthermore, while the postal services remain encumbered by the huge latent risk mentioned earlier, the future national burden may be a vast sum. The postal businesses should be privatized in order to ensure that the costs paid reflect the services provided and so nip the latent risk in the bud. Future revenue from the sale of shares as a result of privatization is likely to reach several trillions of yen and will no doubt be of significant help in restoring soundness to public finance. Moreover, not all users of postal services are "weaker members of society". It should not be forgotten that the costs for persons with sizeable assets, who hold multiple accounts undetected and have more than the maximum permitted amount of ¥10 million invested in postal savings, are also paid out of tax revenues.
Thus, the privatization of the postal businesses should not be regarded simply as question of administrative reform or the efficient management of public corporations, as in the case of JR, but rather as an integrated reform of both the "entry" and "exit" sides, designed to remedy the bloating and inefficiency of the public sector, specifically the postal services/fiscal investment & loans system. In terms of the national economy, too, privatization is the key to eliminating the vast invisible burden and, by allowing the effective utilization of financial assets held by the people, implementing structural reforms that will allow Japan to overcome the coming problems of population decline and population aging. In this sense, the privatization of the postal businesses is essential if Japan is to be transformed from a bloated, bureaucratic nation into a vigorous people-led nation and should be the government's first priority among policy issues. It is important to realize that missing this opportunity could have severe repercussions for Japan's future.
For the opponents of privatization, there are no doubt many causes for concern, including the possibility of a decline in the universal service provided in sparsely populated areas and the question of whether the postal service companies themselves will be efficiently managed. However, the latest amendments to the privatization bill make ample provision for avoiding a "bad privatization" of this kind. Even if fears arise that "bad privatization" may become a reality, a three-person committee of experts is to review the progress on privatization every three years and, revise it as necessary. This is the time to pool our wisdom with a view to achieving "good privatization", ensuring that the four companies created by splitting up the public corporation are able to stand alone in a market economy while maintaining a universal service and do not put pressure on the businesses of existing private-sector companies.
The standoff over the privatization of the postal businesses has strong overtones of a political struggle between reformers and conservatives. Some observers ascribe this to an ideological standoff between market economics and traditional protectionism. However, whether we like it or not, if Japan is to overcome the problems of population decline and population aging, it is vital that existing systems, which are no longer sustainable, be transformed into new systems incorporating the principles of market economics, self-responsibility and self-help. The debate in the House of Councilors must move away from superficial issues and ideological standoffs as soon as possible and every effort should be made to ensure that the bill for the privatization of the postal businesses is discussed from the perspective of the national economy — i.e. how best to ensure the revitalization of Japan's fiscal, monetary and economic systems — and becomes law. The passing or defeat of the bill for the privatization of the postal businesses is the focus of worldwide interest in that it is likely to determine the future of the Koizumi administration's program of structural reform. It is the duty of politicians, not only of the ruling parties but also of the opposition parties, to look beyond their immediate interests and debate the core issues from a higher vantage point. This will also help to make Japan a sound, democratic nation. In this sense, the quality of Japanese politics is more important today than ever before.
For more information on the content of this report, please contact Yumoto, Fujii the Japan Research Institute, Limited.