Discussion Paper Series No. 236
Behold the ‘Behemoth’.
The privatization of Japan Post Bank

Uwe VOLLMER

University of Leipzig

Diemo DIETRICH

Halle Institute for Economic Research

Ralf BEBENROTH

Kobe University
February

2009

The Discussion Papers are a series of research papers in their draft
form, circulated to encourage discussion and comment. Citation anduse of such a paper should take account of its provisional character.
In some cases, a written consent of the author may be required.

Behold the ‘Behemoth’.
The privatization of Japan Post Bank

Uwe Vollmer, Diemo Dietrich, Ralf Bebenroth

Abstract
This paper analyzes the privatization process of the Japanese Post Bank (JPB), the largest
bank in the world. We report some evidence in favour of the “political view” of SOB’s andargue that, before privatization, postal savings banks served as vehicles for politicians toreallocate funds in exchange for private rents. We ask why politicians in Japan decided to
privatize the postal savings system, predict how the privatization will proceed and study the
expected results of the privatization process. We argue that there will be no level playing
field in bank competition after the start of the privatization process and discuss possible outcomes of JPB privatization on financial stability in Japan.
JEL Classification: G21, G28, L32, P12
Keywords: Public banking; Japan; privatization; postal savings banks

U. Vollmer
University of Leipzig, Economics Department, Institute for Theoretical Economics, Monetary economics, Marschnerstraße 31, D-04109 Leipzig, Germany, tel.: +49-341-9733571;
fax: +49-341-9733579; E-mail address: vollmer@wifa.uni-leipzig.de
D. Dietrich
Halle Institute for Economic Research and Martin-Luther-University Halle-Wittenberg,
Kleine Märkerstraße 8, D-06108 Halle (Saale), Germany, tel.: +49-345-7753772; fax: +49345-7753820; E-mail address: ddh@iwh-halle.deR. Bebenroth
Kobe University, Research Institute for Economics and Business Administration (RIEB),
Rokko, Nada Kobe 657-8501, Japan, tel./fax: +81-78-803-7021; E-mail address:
rbeben@rieb.kobe-u.ac.jp

Behold the ‘Behemoth’.
The privatization of Japan Post Bank

Abstract
This paper analyzes the privatization process of the Japanese Post Bank (JPB), the largest
bank in the world. We report some evidence in favour of the “political view” of SOB’s andargue that, before privatization, postal savings banks served as vehicles for politicians toreallocate funds in exchange for private rents. We ask why politicians in Japan decided to
privatize the postal savings system, predict how the privatization will proceed and study the
expected results of the privatization process. We argue that there will be no level playing
field in bank competition after the start of the privatization process and discuss possible outcomes of JPB privatization on financial stability in Japan.
JEL Classification: G21, G28, L32, P12
Keywords: Public banking; Japan; privatization; postal savings banks

1

1

Introduction

Public ownership of banks is very common worldwide. According to Barth et al. (2006:
148-151) about two-third of the 136 countries surveyed in 2001 exhibit some government
ownership in banks; the percentage of bank assets held by government-owned banks was thehighest in China (98 %) and exceeded 40% in twenty more countries (among them India,
Pakistan and Germany). Similar results were provided by La Porta et al. (2002) who showthat the share of assets of the top ten banks owned or controlled by the government
amounted to 42 % in 1996. This share was especially large in countries with a per-capitaincome below average and in countries with underdeveloped financial markets; it was also
large in countries with high state involvement in the general economy and in countries withlow economic growth.
Interestingly, both studies classify Japan as a country with no government-owned banks (LaPorta et al., 2002: 37; Barth et al., 2006: 149) despite the fact that the Japanese Postal Savings System (PSS) is still publicly owned. It laid the basis for an extensive system of financial intermediation by government-run agencies which became known as the Fiscal Investment and Loan Program (FILP, “zaisei toyushi”) and which was designed to channel funds
from the public to certain sectors of the economy (Cargill and Yoshino, 2000, 2003; Cargill,
2001: 146, 159). While both the PSS and the FILP resisted reforms for decades, a 10-years
privatization road map was drawn under initiative of then Prime Minister Koizumi in 2005
which started in October 2007. Accordingly, Japan Post will be split up into four companies
and two of them – among them Japan Post Bank - will be completely privatized until 2017
(NikkeiPB, 2008).
In this paper, we take this recent transformation of the Japanese Post as a starting point to
conduct an explanatory case study on the privatization of the Japan Post Bank (JPB). In general, case studies are the preferred research strategy when the focus is on single contemporary events within some real-time context; they try to illuminate a set of decisions and ask
why these decisions were taken, how they were implemented, and what the results were.
Explanatory case studies offer several competing but also complementary theories in order toexplain the object of interest and compare the ability of each theory to explain the course of
events and why decisions were taken (Yin, 2003; Gerring, 2004; Marschan-Piekkari and
Welch, 2004).

2

In what follows, we address three main questions: First, we ask what led Japanese politicians
decide to privatize JPB. Second, we describe how the privatization will proceed and what
measures will be taken. Finally, we try to predict the likely results of the privatization
process regarding the flow of funds, bank competition and financial stability in Japan. We
have chosen the Japanese case for several reasons. First, Japan Post Bank is – measured by
the size of deposits – the largest bank in the world. 1 Second, JPB formed the basis of aunique and intransparent system of borrowing and lending that operated as a shadowbanking system and is sometimes referred to as “Japan`s second budget” (Cargill andYoshino, 2000: 201). Finally, while privatizations of state-owned banks also occurred inother OECD countries (Boehmer, Nash and Netter, 2004; Meggison, 2005), the Japanese
government followed a privatization strategy that differed in many respects from thosechosen in other countries where public post banks were simply abolished or privatized byselling it to an assuming bank. 2 In Japan, privatization was also subject to much a fiercer
political debate and became a central topic during the 2005 election campaign of incumbent
Prime Minister Koizumi, indicating the special role of the Postal Savings System for Japan.
A number of studies on the Japanese banking system exist. Aoki, Patrick and Sheard (1994)
describe the evolution of the Japanese banking system after World War II; Suzuki (1980,
1987) and Ueda (1994) illustrate post-war bank regulation in Japan. Maruyama (2006)
analyzes privatization of the Japanese Postal Service System but does not pay special
attention to the Japanese Post Bank; Porges and Leong (2006) ask whether privatization
creates a level playing field for postal services. Several papers cover the role of the Japanese
postal bank system before the start of the privatization process. Kuwayama (2000) compares
postal service systems in Japan and the US and analyzes Japanese bank regulations in favorof the Postal Savings Agency during the 1990s. Cargill and Yoshino (2000; 2003, Chapter 4)analyze the role of PSS and FILP in government financial intermediation and evaluate their1
2

As of March 2007, Japanese postal savings system owed deposits totalling 187.0 Trillion Yen (Japanese
Bankers Association, no year; Japan Post, 2008a: 1).
In the US, the postal savings system stopped accepting deposits and was abolished in 1967; about 60 million USD in unclaimed deposits was turned over to the Treasury Department to be held (Kuwayama, 2000;
United States Postal Service, no year); almost the same procedure was applied in Canada. In New Zealandand in some European countries, like Austria, the post banks were privatized and sold to an assuming bank(to ANZ in the case of New Zealand in 1989 and to BAWAG in 2005 in the case of Austria). A privatization strategy comparable to the Japanese was only pursuit in Germany in 1990, were Deutsche Postbank
was formed from the spin-off of the postal savings division of the German Postal Service System (Deutsche
Bundespost). For case studies that analyze privatization of public owned banks in other countries see Haber(2000) for Mexico; Clarke and Cull (2005) for Argentina; Carletti, Hakenes and Schnabel (2005) for Italy;
Clarke, Cull and Fuchs (2007) for Uganda.

3impact on the Japanese economy. Maclachlan (2006) describes the long-lasting politicalpower struggle before the decision to privatize the Japanese postal service was taken.
Iwamoto (2002) and Doi and Hoshi (2003) study the flow of funds from the postal banksystem into public investment projects and estimate the percentage of bad loans involved;
they also study the effects of FILP reforms undertaken in April 2001. Imai (2007) analyzes
politician’s attitudes towards post bank privatization and addresses the question why someJapanese politicians fiercely opposed or supported the privatization plans. Imai (2008)
examines whether JPB helped raising untapped savings from savers that did not have accessto private depository services. Finally, Imai (2009) estimates the political influence on postalbank lending decisions using data on Japan’s government loan from 1975 to 1992.
None of this work, however, is concerned with the now ongoing privatization process ortries to appraise the possible effects of postal bank privatization for the Japanese banking
sector. Before privatization will be completed, Japan Post Bank might still keep a dominantrole in lending in Japan but shall change its appearance completely. For that reason, we analyze the set of rules under which Japan Post is likely to do business during the upcoming
decade and ask for the consequence for the flow of funds, for bank competition and for financial stability in Japan. Our findings are largely consistent with the “political view” onpublic banks according to which politicians influence lending decisions of public banks toincrease their chances to be re-elected. We draw upon evidence according to which before
privatization public bank lending was politically influenced with a great percentage of nonperforming loans involved. We argue that this exertion of political influence on lending islikely to be reduced after privatization has been completed and that JPB privatization willcontribute to an enhanced stability of the Japanese financial system because it improves incentives for depositors to monitor banks and to exert market discipline on them.
The paper is organized as follows: Section 2 provides an overview over the recent literatureon the welfare effects of public banks. Section 3 presents the reasons why JPB privatization
started in 2007. Section 4 describes the privatization strategy and the time schedule chosen.
Part 5 evaluates whether the measures taken are eligible to create a level playing field inbanking and to improve financial stability. Section 6 concludes the paper.
2

Welfare effects of public banks

The banking literature offers two views on why public banks exist and what their welfare
effects are (overviews in La Porta et al., 2002: 265 ff.; Sapienza, 2004). One is the “devel4

opment” or “social view”, which regards public banks as important vehicles to channel private savings into private investments and considers them as an impetus for financial andeconomic development. According to this view, many investment projects are characterized
by positive externalities and private returns are smaller then social returns; these externalities
are not internalized by private banks which therefore do not finance socially valuable projects; public banks, however, are capable to internalize these externalities. 3 In contrast, the“political view” considers public banks as vehicles for politicians to reallocate financial
funds to public sector entities in exchange against votes, political concessions or bribes(Kornai, 1979; Shleifer and Vishny, 1994; Boycko, Shleifer and Vishny, 1996). Public banks
are, hence, according to both views, reallocating financial flows inside an economy with,however, different welfare effects. While they help, according to the “social view”, to correct market imperfections and to implement socially valuable investment projects, they serve,
according to the “political view”, to implement politicians` private goals and to finance socially undesirable projects.
The empirical literature largely supports the predictions of the “political view”. Recent
cross-country studies (Faccio, 2004; Dinç, 2005; Micco, Panizza and Yanez, 2007) find thatcompanies with srong political connections have better access to external finance and pay
less taxes than companies without such contacts. Moreover, public-owned banks seem toincrease their lendings before elections; they are less profitable then private banks and thedifference in profitability increases in election years. These results are confirmed by singlecountry studies which provide evidence for exertion of political influence on lending conditions of public banks (see Fisman, 2001 for Indonesia; Johnson and Mitton, 2003 for Malaysia; Ramalho, 2003 and Barros, 2008 for Brazil; Sapienza, 2004 for Italy; Khwaja and Mian,2005 for Pakistan; Bertrand, Schoar and Thesmar 2007 for France; Cole, 2006 for India).
In contrast to this empirical evidence, the recent theoretical literature provides some arguments in favor of the “social view”. Allen and Gale (2000) argue that public banks might beable to prevent financial contagion and thereby contributing to increased financial market
stability; similar positive effects on the stability of the banking sector are derived by Hakenes and Schnabel (2004). 4 Hakenes and Schnabel (2006) analyze possible effects of public

3
4

The social view can be traced back to Gerschenkron (1962); a more recent version is provided by Stiglitz(1994).
In contrast, O`Hara and Easley (1979) argue that the US Postal Savings System acted as a safe-haven forsavers during the Great Depression, thereby destabilizing the banking system, especially the savings &loans industry. The US PSS was founded in 1910 after a banking panic as a second best alternative to a5banks` regional limitations on business activities and show that these limitations may contribute to prevent a capital drain from poor to rich regions inside integrated financial markets.
Hainz and Hakenes (2008) consider a situation where a politician may choose among investment projects which generate private rents for him; projects, however, differ in their
creditworthiness which is not known to the politician. In their model, granting public aid via
public banks may increase social welfare relative to direct subsidies if public banks are notallowed to fully compete with private banks. Finally, Vollmer and Hauck (2008) study theconsequences of a public bail-out for loan supply. When the public owner has to cover losses
if the bank’s repayment obligations to depositors exceed loan repayments, a bank may finance more socially beneficial projects.
Against the background of these empirical and theoretical studies, we now turn to the case ofJapan Post Bank and try to evaluate the effects of JBP privatization on flow of funds, bankcompetition and financial stability in Japan. We report the reasons why privatization wasstarted and describe the privatization strategy chosen. We are interested in the likely resultsof JPB privatization for the flow of funds, bank competition and financial stability in Japan.
3.

Reasons for privatization of Japan Post BankThe Japanese Postal Savings System was founded in 1875 and was modeled after the British
example; a nation-wide system of post offices was established that also accepted savings
deposits. 5 By 1900, services were offered in all Japanese cities, towns and villages. The
number of post office locations further grew and soon exceeded that in the US and othercountries. During the first years, PSS only provided domestic money order services alongwith savings deposits; direct transfer (giro) services were added starting in 1906; beginningin 1916, the post offices also offered life insurances.
On the liability side, postal savings banks specialized in offering small size accounts for lowincome households and competed especially with private savings banks which paid higher
interest rates on accounts but were regarded as being less safe then the postal savings system.
Bank safety sometimes played a major role in the late 1920s when private savings banks

5

governmant guarantee of bank deposits. While it was very small during most time of its existence, it experienced “almost explosive growth” in the early 1930s. During this time, it drained off liquidity from savings& loans and from regions with high rates of bank failures. Moreover, it diverted funds to the US Treasury,
thereby reducing bank reserves and the money supply.
On this and the following see Kuwayama (2000), Maclachlan (2006) and Japan Post (2008b). According toKuwayama (2000), the UK was the first country offering postal savings services in 1861. It was followed by
New Zealand (1867) and Canada (1868) and Belgium (1870); the last OECD country founding a postal savings system was Denmark (1991).

6were particularly hard hit by financial panics and when postal savings accounts significantly
increased as percentage of all deposits. Matters of bank safety, however, lost importanceafter Word War II when, under the “convoy system”, the government implicitly backed
every bank – especially those whose liabilities were households` savings – against any formof default. In this protective environment, concerns over private banks` safety could not forma major determinant of the demand for postal savings – instead, the extent of branching andthe pricing of services was a more important factor. Because Postal Savings Banks werewidespread, private banks made no serious efforts to collect households` deposits by expanding branches. Interest rates were regulated by the Ministry of Finance (MoF) which fixed apremium for interest rates payed on postal deposits compared to private bank deposits; thisspread was more or less kept constant until the beginning of the 1990s when interest rateceilings on private banks´ accounts were abolished and the postal savings system was required to keep its interest rates in line with those on deposits with private banks (Kuwayama,
2000; Cargill and Yoshino, 2003; Kinoshita, 2008).
Matters of bank safety, again, regained importance during the 1990s when the Japanese financial industry experienced an enormous amount of bad loans and witnessed failures ofmany banks which was encountered by, e.g. injections of public funds into banks, huge public deficits and a streamlining of bank managements. The government abolished the convoy
system and established a government-sponsored deposit insurance system which covered
deposits without limit; depositors of failing banks, however, were not paid-out but their deposits were instead transferred to a bank which assumed the business of the failed bank. 6
This resulted in a complete reorganization of the Japanese banking industry as existing banks
were merged and new banks were established. Though no depositor lost his deposits, a regime shift took place and the safety motive for using postal savings reappeared as postal
savings accounts were directly guaranteed by MoF and their holders had not to fear to betransferred to an assuming bank. 7 In consequence, the post office` deposit share increased
during the 1990s (Kuwayama, 2000).
Moreover, postal savings banks had always offered special time deposits (called “teigaku”
savings or “fixed amount postal savings”) that were superior to any other time deposit offered by private banks: Teigaku savings were ten-years time deposits that granted savers the67

In cases were no assuming bank could be found, the business was transferred to a “bad bank”. See Nakaso(2001).
Since postal savings accounts are guaranteed by MoF, the Post bank system is not member of the Japanesedeposit insurance system DICJ. However, it will become a member after privatization; see section 4 below.

7

opportunity to withdraw funds on short-notice and without a penalty after a six months holding period. This made them very liquid and reduced the exposure of deposit holders to interest-rate risk. If interest rates rise, the holder may withdraw deposits and redeposit them at ahigher interest rate; if interest rates decline, however, the deposit is maintained at the interest
rate current when the deposit was established. Though there was a formal limit of 10 million
Yen to the amount of postal deposits per individual or household, this limit was not rigorously enforced; moreover, many wealthy savers circumvented the limit by holding multiple
accounts. 8
On the asset side, the Japanese postal service system always conducted narrow banking, i.e.
invested into low risk government bonds or assets equivalent to them. Only in the first years
after PSS was established, postal savings were deposited in private banks with the intent thatfunds were managed in cooperation with the government (Cargill and Yoshino, 2003). From1884 onwards, however, after some private bank failures, postal savings were removed fromprivate banks and transferred to an account at MoF that was later called the Trust Fund Bureau. 9 The Ministry first invested funds into government bonds but, from 1888 onwards,
postal savings were channeled into government-related banks or forwarded to various government-affiliated institutions whose lending was guided by MoF. After the Second World
War this system was formalized and named FILP; in effect, postal services became “a huge,
opaque pool for funding for various policy lending purposes.” (Kuwayama, 2000: 93). 10
Under FILP, funds were channeled to local governments, government-affiliated public companies and to government financial institutions that acted as highly compartmentalized andspecialized niche lenders; they gave loans to preferred borrowers, such as small firms, mortgage borrowers and borrowers in underdeveloped areas (Iwamoto, 2002: 588; Amyx, Takenaka and Toyoda, 2005). Budget allocation to FILP did not require parliament approval(unlike the national budget). While government-sponsored loan programs do exist in many
countries, the Japanese one was outstanding because of its size; by end of March 2001, the
FILP program involved more then 400 trillion Yen (which was equal to 82% of Japanese8910In effect, virtual every resident in Japan holds a postal savings account: There are a total of 118 million
savings accounts for a population of 127 million (Imai, 2007). Private banks were not officially prevented
from offering teigaku types of accounts but often decided not to offer them because of the interest rate risk
involved; postal savings banks were able to supply them because of the government backing (Cargill andYoshino, 2003: 50).
The account was first called “Deposit Bureau”. See Cargill and Yoshino (2003: 43).
Note that FILP ws not an institution or a government agency but a process of decision making that channeled funds to targeted sectors of the economy. Sources for FILP funds came not only from postal savings
but also from postal life insurance premiums and from pension premiums. See Cargill and Yoshino (2003:
16).

8

GDP; Doi and Hoshi, 2003). Though the FILP intended to foster social goals by financing
projects with large positive externalities, there is some evidence that FILP in fact fundedwasteful projects and unviable borrowers for political purposes. According to Doi and Hoshi(2003), the FILP had outstanding loans amounting to around 350 trillion Yen in 2001 fromwhich 75% were loans to already insolvent recipients; they estimate the cost to tax payers toclear up expected FILP losses to be at least 75 trillion Yen (over 15% of 2001 GDP).
Though one should expect losses if a government agency finances projects with large positive externalities, the bad performance of loans under the FILP program were due to the factthat decisions to grant loans were largely politically influenced. Japanese politicians, especially from LDP, used FILP to benefit their supporters or to provide financial assistance totheir voting groups; government ministries or agencies did not intervene because FILP agencies or government corporations through which FILP loans were allocated offered-post retirement positions for bureaucrats or absorbed personnel from ministries that had to reduce
their staff (Amyx et al., 2005: 30).
Several studies indicate such a political use of funds deposited in PSS accounts. Imai (2006)
uses prefecture level panel data on Japan’s government loans from 1975 to 1992 and showsthat prefectures that were represented by more influential LDP members received more governmental loans from the FILP program. She also founds out that the amount of FILP loans
increased in prefectures were the ruling LDP candidates became more electorally vulnerable.
Similar evidence is provided in Patterson (1994) for the period 1975 to 1981. These statistical links between loans and political factors did only exist in governmental loans, not inloans by private banks, so that these findings are no artefacts of fluctuations in prefecturalloan demands. She concludes from these findings that government loans have served privateinterests of LDP members and their supporters, supporting the political view of governmentbanks.
These results are completed by another study that finds empirical support for a crowding-out
effect of JPB on local economies which also point in the direction of the political view (Imai,2008). Beginning in 2000, a large share of postal time deposits were maturing and PSS experienced a large outflow of funds. Prefectures with higher shares of postal savings tended toexperience larger outflows of deposits from PSS to private banks. More important, theprecedent shift of funds (in the early 1990s) from private banks to PSS had negative effects
in particular on small firms which – more than large firms – rely on local banks that directlycompete with JPB for deposits.
9Discussions about privatization of the postal savings system already started in the 1980s under Prime Minister Nakasone as a reaction to a rising government deficit. 11 While threeother major public companies (Japan National Railway JNR, Nippon Telegraph and Telephone NTT and Japan Tobacco JT) were partially privatized, the government, however, hesitated to privatize the postal service system for a long time. This hesitation only ended in
1997, when the Administrative Reform Council (“Gyōsei Kaikaku Kaigi”), headed by thenPrime Minister Hashimoto, recommended the privatization of the postal system’s financial
business parts. After some fierce resistance from opposition parties and especially fromsome fellow LDP members, the “postal lobby” forced the council members to find a compromise that did not aimed at privatization of JPB but urged a change in the formal relationship between PSS and FILP.
The reformed PSS and FILP system, starting April 2001, provided a shift in the managementof the postal system from the Ministry of Post and Telecommunication to Japan Post as a
newly independent public corporation (in which employees retained their status as public
servants). 12 The reform further called for complete autonomy over the manner in which Japan Post invested postal savings and insurance funds; the Trust Fund Bureau ceased to exist.
Finally, the new regulations urged government agencies that traditionally relied on FILP
loans to issue own securities to finance their projects. Hence, Japan Post had no formal obligation to finance FILP and FILP agencies had no more automatic access to postal savings
funds. Instead, FILP entities had to raise funds either by issuing own bonds or by loans froma newly founded Fiscal Loan Fund that was financed by bonds issued by MoF.
These reforms were intended to introduce some form of market discipline into the operationsof government agencies and to cut off the flow of savings into obviously unproductive public investments. In effect, however, Japan Post still absorbed the bonds issued by the government agencies and the flow of funds from postal savings to MoF and government agencies did not change significantly immediately after the creation of Japan Post and FILP reform; one reason was that postal savings invested into a FILP accounts earned interest rates
higher than Japanese Government Bonds (Iwamoto, 2002: 585-591; Maclachlan, 2006: 8;
Doi and Hoshi, 2003: 16; Taki, 2005: 24).

11
12

On this and the following see Amyx (2004); Amyx at al. (2005); Imai (2007).
In June 2001, the Ministry of Post and Telecommunication was renamed in Ministry of Public Management,
Home Affairs, Posts and Telecommunications (MPHPT), from 2004 onwards the Ministry of Internal Affairs and Communications (MIC).

10In 2001, the newly appointed Prime Minister Koizumi set up a panel clarifying the true extend of Japan Post’s unrealized losses and sent bills to the Japanese National Diet implementing the reform proposals of the reform report mentioned before. The main motivation
behind this reform effort was to increase efficiency in the financial sector, to relief postal
savings from the power of vested interests and to reduce bureaucratic mismanagement ofpublic funds. In 2004, numerous articles in Japanese newspapers focused on inefficiencies inpostal savings operations and on low return on capital compared to private banks (Amyx etal., 2005). The anti-privatization lobby countered that privatization causes a loss of “universal services”, i.e. the provision of postal services at uniform rates to all communities acrossthe country. Especially post offices in small cities and in rural areas were expected to close
down or to merge with other post offices. Personnel in these offices feared losing their jobs
(Maclachlan 2006: 9). 13
Opposition against privatization came from the postal lobby which included local politicians
and the “National Association of Commissioned Postmasters”, a pressure group with close
connections to LDP. 14 The majority of post offices in Japan, especially in rural areas, are“special post offices” which are run by commissioned post masters, i.e. private citizens contracted by the state to perform government services. 15 Though postmasters were, by law, notallowed to campaign for specific candidates in elections, they acted, in fact, as vote-gatherersfor LDP and helped to mobilize votes. Postmasters were able to perform this function because they enjoyed a high social status and were often engaged in prestigious volunteer activities that gave them authority within their networks. These functions made the special
postmasters association very influential inside LDP and decisive to the question what reform
proposal could be considered in the LDP. Members of the “postal tribe” inside LDP headed

13

14
15

This fear of loosing universal services, however, seemed to be somehow exaggerated. According to a 2003
report by the Japaese Bankers Federation only 10 out of more then 3200 cities, towns and villages in Japan
lacked any type of private financial institution and solely depended on postal financial services. The numberof individuals left without access to a financial institution in their immediate locality, should PSS be closed,
amounted to only around 6,800 persons nationwide. See Amyx at al. (2005: 40-41).
The historical reasons for these connections are explained in detail in Maclachlan (2004).
Currently, there are more then 24,500 post offices in Japan and most of them are so-called “special post
offices” with only one or two employees per office (Japan Post 2008a). They are barely engaged in delivery services but mainly offer deposit services and thus directly compete with private banks for loanable
funds. The number of Post Offices outperformes the total number of bank branches (just over 22,000 in theearly 2000s); see Maclachlan (2004: 284) and Imai (2008: 6).

11

committee’s on the LDP`s Policy Research Council where new legislation was discussed
before being submitted to Parliament (Amyx et al., 2005; Machlachlan, 2004; 2006). 16
Due to demographic and technological reasons, however, the special postmaster association’s political influence dropped during the 1990s (Amyx, 2004). Migration decreased theelectorate in rural areas so that the number of people fell who looked at the postmaster for
guidance on whom to vote for. Voters got access to different sources of information about
politics and candidates. In consequence, opposition from the postal lobby weakened andPrime Minister Koizumi started the postal reform process: In November 2004, he shuffled
his Cabinet, appointed reform-minded persons as new ministers and created the new position
for postal privatization in early 2004. 17 Moreover, Koizumi initiated the Council on Economic and Fiscal Policy (CEFP) that started discussion of postal privatization and, in September 2004, released a report (“Basic Guideline for Postal Privatization”) that served as ablue-print for the coming legislation (Council on Economic and Fiscal Policy, 2004). In
spring 2005, Koizumi brought in to Parliament a proposal for a post privatization law, vowing to “discipline” bureaucrats or opponents from his own party and to call a general election
should the privatization bills do not pass the Diet. After the Upper House did not pass theprivatization bills, Koizumi dissolved the Lower House of the Diet and called for a generalelection in September 2005. A few weeks later, the postal privatization plans passed bothchambers of the Diet (Maclachnan, 2006: 13-14). 18
4.

JPB privatization strategy and time schedule

Even before the start of JPB privatization, the Japanese government had decided to reform
those public financial institutions that had as FILP agencies access to funds deposited into
the postal savings system. By end of March 2007, two FILP were completely privatized, one
was abolished, and a fourth one was replaced by another agency. The remaining five FILP
16

Imai (2007) uses data from the 2003 pre-election survey of all candidates for the House of Representatives
in 2003 and also from the voting patterns of LDP members on a set of postal privatization bills in 2005 toinvestigate the reasons why politician were in favour or against postal savings privatization. She found outthat politicians coming from areas with a higher concentration of special post offices were more likely to
oppose privatization because workers and postmasters were likely to be adversely affected by the planned
privatization. Moreover, she finds evidence that politicians with a stance for a more interventionist government were more inclined to oppose postal privatization.

17

Heizo Takenaka was appointed Minister of Postal privatization; he had served as Minister for Economic
and Fiscal Policy since 2001 and kept this position even after appointment as Minister of Postal Privatization.

18

A bill proposed by opposition parties to freeze privatization of Japan Post was voted down in December
2008. See Japan Times Online (2008b). In February 2009, new Prime Minister Taro Aso called for a reviewof the current division of Japan Post into four firms. See Daily Yomiuri Online (2009).

12

agencies were merged into one “Policy Finance Institution” whose function shall be limited
to fund procurement support to small- and medium-sized enterprises and individuals. As aresult, flows of funds into FILP agencies decreased significantly during recent years. FILP
budget has shrunk to 14.2 trillion Yen in 2007 from a peak level of 40.5 trillion Yen in 1996;
FILP-related debt accumulation has also contracted from 418 trillion Yen in 2000 to 250
trillion Yen in 2007 (Ministry of Finance, 2007).
Figure 1: Privatization process of Japan Post
(Partial) Privatization (October 2007)
Government
100% share

Japan Post
Insurance

Japan Post
Bank

Japan Post
Service

The Incorporated
Administrative Agency
Management Organization
For Postal Savings andPostal Life Insurance

Japan Post
Network

Transitional
PeriodJapan Post Holdings

Final Privatization (October 2017)
Government
Over 1/3 share

Japan Post Holdings
Japan Post
Insurance

Japan Post
Bank

Japan Post
Service

Japan Post
NetworkThe Incorporated
Administrative Agency
Management Organization
For Postal Savings andPostal Life Insurance

Source: Ministry of Internal Affairs and Communication (no year); modified by the authors.

The privatization laws that passed the Diet in 2005 only roughly outlined the parameters of
the change for Japan Post. The details of the privatization will be settled by two governmentaffiliated committees, the “Headquarters for Promoting Postal Privatization” and the “Postal
Services Privatization Committee (PSPC)”. The first committee was established in 2005, isranked at cabinet level and consists out of all cabinet members with the Prime Minister aschairperson and vice-chairpersonship of several cabinet ministers. It had to prepare submission and enactment of privatization bills; it will debate broad policy measures relating to
implementation of privatization. The second committee (i.e. the PSPC) was established after

13

the start of the privatization process and consists out of five non-government experts. It
works as a surveillance group; it will track the process of postal privatization between 2007
and 2017 and will make recommendations for change to the relevant ministries or to thehead of the first committee, i.e. to the Prime Minister (Maclachnan, 2006: 14).
In October 2007, privatization of Japan Post started with the division into four separate private entities – Japan Postal Service Co., Japan Post Network Co, Japan Post Bank Co. andJapan Post Insurance Co. – under the roof of one holding company, named Japan Post Holdings Co. Of these companies, Japan Post Service Co. will manage the mail delivery services
and Japan Post Network Co. will control the post offices and their real estate. At first, theHolding Company holds the entire issued stocks of all four companies and, in turn, it will becompletely owned by the Japanese Government, which has to reduce its stake in the Holding
Company to (more than) 33 percent of the total number of issued stocks and dispose the rest
as soon as possible. This obligation imposed on the government has no time limit. 19
As early as fiscal year 2010, Japan Post Bank Co. and Japan Post Insurance Co. are expected
to go public and no later than September 2017 all shares of the two companies will be tradedon the market; after 2017, however, the government holding company will be allowed to byback a few percent of the total shares of the savings and insurance companies. 20 The stocksof the two remaining firms - Japan Post Service Co. and Japan Post Network Co. - will beentirely held by the Holding Company; besides, these two units will also be allowed to buy
shares of the financial units to form a group through cross-holding (Council on Economic
and Fiscal Policy CEFP, 2004; Maclachlan, 2006: 13; Takahara, 2007; Japan Post, 2008c,
see also Figure 1). After privatization is completed, JPB will be fully obliged to pay taxes
and - like any other financial institution - be subject to the Japanese banking law. 21
During the transitional period, however, special bills granting additions to the banking law
shall be enacted which apply to the bank’s deposit taking business as well as to its asset
management and scope of business; furthermore, the two postal companies are subject toadditional regulations stipulated by the Privatization Law. Before the start of privatization,
deposits with Japan Post mainly consisted out of “floating deposits” that could be withdrawn
19

20
21

According to the Japanese commercial code, some decisions taken on a company’s shareholders’ meeting
require a two-thirds majority; hence, the Japanese government keeps a blocking majority in the Holding
Company.
In December 2008, the government considered a delay in the planned final sales of JPB shares beyond 2017
because of falling stock market prices. See Japan Times Online (2008c)
Moreover, at the time of privatization, employees of Japan Post will loose their status as civil servants andwill instead become employees of the new private companies.

14

at any time on short notice and various types of time and savings deposits which earn ahigher interest rate but stipulated a fixed investment period or a fixed notice period. Among
postal savings, teigaku savings deposits played a dominant role (around 65% of all time andsavings deposits with Japan Post at the end of fiscal year 2006 were of this type; see Table 1).
Until end of September 2007, all deposits were guaranteed by the government, but on October 1, 2007, teigaku installment savings and time deposits were differentiated between thoseconcluded before privatization (“old contracts”) and those concluded after (“new contracts“);all floating deposits were defined as new contracts.
For all new contracts (floating deposits and ‘new’ teigaku savings), government guarantees
on postal savings were abolished and deposits are insured by the Deposit Insurance Company of Japan (DICJ); the nonexistence of government guarantees for floating deposits concluded after October 1, 2007 has been explained to the public. 22 “Old contracts” together
with corresponding assets accounts were assigned to a corporate body that succeeded theJapan Post. They are still guaranteed by the government but the administration and investment of assets and liabilities are commissioned to JPB which has to pay “virtual” deposit
insurance premiums on these accounts to the government (Council on Economic and Fiscal
Policy CEFP, 2004: 7-9; Office of the United States Trade Representative, 2007). 23
Table 1: Balance of postal savings by type; FY 2003-2006; billion yen
Classification
Ordinary and Collection Savings
Teigaku Savings
Time Savings (incl.
Housing Collection
and Education Collection Savings)
Total

End of FY 2003
54,155.7

End of FY 2004
56,039.6

End of FY 2005
56,639.3

End of FY 2006
56,336.3

160,189.8
13,036.6

146,440.1
11,669.2

135,393.1
7,971.0

120,994.7
9,638.2

227,382.0

214,149.0

200,002.3

196,969.2

Source: Japan Post (2008a: 12).
As a by-product of these privatization procedures chosen, the above-mentioned exceptions
from the banking law were stipulated to create a level playing field between JPB and otherprivate banks. First, before privatization, a fixed ceiling of Yen 10 million deposits per de22
23

All floating deposits, however, are currently covered 100% by DICJ.
This public successor company is called “Incorporated Administrative Agency Management Organization
for Postal Savings and Life Insurance” and is independent of Japan Post Bank Co. (and Japan Post Insurance Co.). It has to separate “old” and “new” contracts and to prepare and disclose annual financial statements. Asset management arisen from the old contracts is delegated to Japan Post Bank by way of deposit
contracts. The FSA and MIC ensure that “profits arising from pre-privatized accounts are not unfairly transferred to Japan Post Bank …through the deposit …contracts” (Office of the United States Trade Representative, 2007: 53).

15

positor existed that was meant to create a level playing field with other private banks where
deposits were not guaranteed by the government but were insured up to the same amount by
DICJ. This cap still existed after the start of privatization but JPB has already requested toremove the ceiling on floating deposits to achieve smoother settlement of individual customers; the government’s reaction to this request is still open. 24 Second, JPB is obliged to holdsufficient safe assets corresponding to the amount of postal savings inherited from Japan
Post (i.e. corresponding to the amount of “old contracts”). Accordingly, a large proportion ofassets of JPB’s assets (around 75% as of March 2008) constitute of Japanese Government
Bonds (JGB) which are free of any default risk; they are, however subject to substantial interest-rate and liquidity risks (Kinoshita, 2008). Finally, when JPB wants to expand its business, it must be approved by the Prime Minister (who delegates this power to the Commissioner of the Financial Services Agency (FSA) and the Minister of Internal Affairs andCommunications MIC). 25 MIC and FSA will examine whether business expansion is appropriate, taking into account a “level playing field” (i.e. conditions affecting competition between JPB and other financial institutions) and JPBs business conditions; before taking adecision, they must take into consideration the opinion of PSPC. 26
5.

Consequences for bank competition, flows of funds, and financial stability

Observers both in Japan and abroad expressed concerns that a privatized JPB will enjoy
some regulatory advantages over their competitors and will not act on a level playing field.
In Japan, private-sector financial companies feared that JPB will enter into their markets andmay distort competition by introducing new products before the implicit government guarantee of deposits is abolished; moreover, until the completion of the privatization process, JPB
can use state-owned assets (like post office buildings) without bearing any cost. Critics argue
the new postal group should not be allowed to launch new businesses as long as the government holds a stake in it. 27 Likewise, the US Trade Representative asked the Japanese gov-

24

In July 2008, the Japan Post Bank has asked the government for a lifting of the ceiling on ordinary accounts;
the ceiling will still apply to other types of deposits, such as time deposits. See Japan Times Online (2008a).
25
It is not stated what happens in the case of conflict between both Ministries.
26
The following businesses have been approved on December 19, 2007: Syndicated loans and loans to SPC(starting 1/2009); trading of public bonds (start after ending of preparations); trading of securities (3/2008);
acquisition and transfer of loans (2/2008); derivatives trading (3/2008), reserve repo transactions (start afterending of preparations). On April 18, 2008, the following businesses were also approved: Credit card business (5/2008); sales of life insurance products such as individual variable annuity (5/2008); brokerage of allied bank’s housing loans (5/2008). The granting of consumer loans has not yet been applied but JPB is
willing to provide consumer loans in the future.
27
See Japan Times Online (2007) and Japanese Bankers Association (2007). For fiscal year 2004, experts
estimated the government's implicit subsidies to Japan Post amounting to 943 billion Yen. The implicit sub-16

ernment to clarify the relationship between Post Bank’s new companies and to guarantee that
regulatory obligations meet arms-length rules; moreover, cross-subsidization between preprivatized accounts and new accounts shall be prevented and measures should be taken toeliminate perceptions that an implicit government guarantee exists for JPB deposits opened
after October 1, 2007. 28
The Japanese government responded by announcing that a privatized Post Bank will be subject to the same regulations as any other financial institution: 29 According to Japanese banking laws, FSA has sole authority over the supervision and inspection of Japan Post Bank andapplies the same standards as those applied to other banks. FSA may also impose stricter
orders, such as business suspensions (Takahara, 2007). JPB will be subject to the same licensing, disclosure, and supervisory requirements as other financial institutions. Japan Post
Network is allowed to make agency contracts with any private bank other than Japan Post
Bank and in terms of access to post branches equivalent conditions are secured between Post
Bank and other private banks. Finally, the government promised to ensure that the relationship between Japan Post Network Co. and Japan Post Bank Co. are like between independent partners, i.e. with arms-length-rule. Ex-post cross-subsidization among postal companies
shall be prevented.
Despite of all these provisions taken by the Japanese government, however, there are still
doubts whether JPB is really able to act on a level playing field with other private banks inparticular during the transition period. First, until 2017, JPB may remain at least a partiallygovernment-owned bank and could retain its image as a government-managed entity where
all deposits are implicitly government-guaranteed. While, e.g., the chairman of PSPC hasemphasized that “the ‘implicit government guarantee’ has no place to exist” (Tanaka, 2008),
it remains an open question to what extend this is credible to the public. Besides, despite thefact that JPB is loosing market share to competitors, it is still a very large bank that may be“too big to fail”. While this hold true for other large city banks, too, JPB is still very important for households` savings since it enjoys a broad customer base in rural areas and it hasaccess to savings from regions that have been neglected by other banks.
Second, as mentioned above, “old” deposits are still guaranteed by the government. While
the Holding Company bills JPB with costs equivalent to insurance premiums on these depos-

28
29

sidy comes from saved deposit insurance fees, stamp and corporate taxes, and from government support
needed to offer higher deposit interest rates. See Japan Times Online (2005)
See Office of the United States Trade Representative (2007); International Herald Tribune (2007).
On this and the following also see Office of the United States Trade Representative (2007: 51-54).

17

its, there will be no flow of funds since premium payments are only “virtual” or “actuary”;
hence, JPB receives a zero-interest loan from the government amounting to unpaid yearly
insurance premiums on old contracts. Though deposit insurance premiums are very low at
the moment, 30 postal savings amounted 186 trillion Yen in March 31, 2007, i.e., shortly before privatization (Japan Post, 2008a: 126); hence, the premium payments saved by JPB
may sum up to 151 billion Yen (USD 1.5 billion) yearly which represents 8.5% of JPB ordinary income resp.15.8% of ordinary expenses (1,768 billion Yen resp. 954 billion Yen in
fiscal year (FY) 2007; Japan Post, 2008a: 13, 17). 31
Doubts are also in order about whether or not JBP will be able to contribute to financial stability in Japan during the coming decade, and this could depend on the future course of interest rates in Japan. As mentioned above, JPB has invested around 75% of its assets inJapanese Government Bonds which are default-safe but subject to a significant interest rateand liquidity risk. Currently, interest rates are very low in Japan; once they increase, thebank will incur a huge capital loss.32 JPB, hence, has gradually to shift its asset composition
away from government bonds and to diversify its portfolio; if it tries to sell government
bonds at once, yields would jump and this would hurt the value of its remaining government
bond holdings. 33 Before privatization, the President of Japan Post had already announced
that the bank intends to diversify into retail banking – mortgage, credit cards and lending tosmall businesses – and thus to intrude into the traditional business realm of regional banks(Ogata, 2007; Tanaka, 2008).
Solvency problems could be accompanied by liquidity problems if depositors shift their deposits from JPB to private banks. Massive shift of funds away from the postal savings system into other Japanese banks have already begun. While at the end of FY 1997, deposit
holdings with Japan Post consisted out of 36.2% of all domestic deposits in Japan, this market share has fallen to 24.8% at the end of FY 2008; especially severe was the outflow oftime and savings deposits where the market share dropped from 36% at the end of FY 1997

30
31
32

33

They amount to 0.108% for “Payment & Settlement Deposits” and to 0.081% for “General Deposits” in
2008. See DICJ-website.
The estimate of premium payments saved, however, does not take into account the existence of the 10 million Yen caps for postal savings.
Even a small increase of 50 basis points every year for five years could expose JPB to a substantial profit
reductions from 507 billion Yen to 131 billion Yen in FY 2011; information from interview conducted by
Bebenroth and Vollmer.
JPB has, instead, increased its holdings of long-term and medium-term government bonds during FY 2007.
See Japan Post (2008a: 9).

18

to 16.1 % at the end of FY 2008. 34 In March 2008, total deposits with JPB amounted 181
trillion Yen falling from 262 trillion Yen at the end of FY 1999. At the same time, there wasa large shift of funds away from savings deposits into floating deposits which almost doubled their share during the time of period considered and covered nearly 40% of all domestic
deposits at the end of FY 2007 (see Figure 2).
Figure 2: Share of JPB in domestic deposits: 1997-2007 (in %)1997 .2

36

15.2

48.6

1998 .2

36.4

15.5

47.8

1999 .2

36.5

16.6

46.7

2000 .2

34.8

18.2

46.9

2001 .3

32.9

23.1

43.7

2002 7.7

23.8

25.1

43.4

2003 7.9

22.7

26.6

42.8

2004

8.3

21.2

28

42.5

2005

8.6

19.5

30.1

41.9

2006

8.6

17.9

30.8

42.8

2007

8.7

16.1

31.7

43.5

20%

40%

0%

60%

80%

100%

JPB Floating Deposit

JPB Time Deposit

Other Banks Floating Deposit

Other Banks Time Deposit

Source: Bank of Japan, Japan Post, own calculations.
With interest rates rising, this shift away from JPB deposits could accelerate in the future,
because holders of “old” teigaku savings might take the put option and terminate their teigaku holdings before maturity. While old savings are still government guaranteed, this riskadvantage could loose some of its attractiveness if interest rates rise beyond a certain level
where savers value interest incomes foregone more than safety. A redeposition of teigaku
savings with JPB might not be attractive anymore for savers since “new” deposits are no
more guaranteed by the government but are insured by DICJ - like deposits with any otherprivate bank. Hence, raising interest rates could put JPB at risk and could unhinge the `Behemot´.
6.

34

Conclusions

The sharp decrease in FY 2000-2001 was due to a large volume of teigaku savings that reached maturity.
Because interest rates were declining in the 1990s, savers had strong incentives to hold teigaku time deposits until maturity.

19

In this paper, we studied the ongoing privatization process of Japan Post Bank (JPB). We
reported that, before privatization, postal savings were channeled into a government-directed
investment program (FILP) where loans were politically determined with a large extent of
non-performing loans. While reforms of FILP began as early as 2001, Japan Post
privatization started in October 2007 and made JPB subject to banking regulation andsupervision through FSA.
The major goal of the privatization process is to unlock JPB`s financial assets and to makepostal savings available to private investors. While this goal may be reached, the Japanese
government was also eager to ensure a level playing field in bank competition and to secure
financial stability. We argue that some of the existing provisions put JPB on a competitive
advantage vis-à-vis its competitors: It may retain the image of a government-managed bankwith an implicit government-guarantee of its deposits and does not have to pay deposit
insurance premiums on “old deposits” that are still guaranteed by the government. Moreover,while Japan Post Bank may enjoy some privileges which other Japanese banks do notpossess, JPB, bears the burden of a large interest rate risk on Japanese government bonds
and is prone to the risk of massive disintermediation if depositors use their put option on“old” teigaku savings and search for better investment opportunities. This scenario could
come true if interest rates rise.
As mentioned in the introduction, the privatization strategy chosen by the Japanese
Government differs from strategies chosen in other countries where PSS were simply
abolished or were PSS were privatized and sold to an assuming bank. A privatization
strategy similar to Japan, however, was used in Germany in 1990, were Deutsche Postbank
was formed from the demerger of the postal savings division of the German Postal Service
System (Deutsche Bundespost). At first, Postbank became a wholly-owned subsidiary ofDeutsche Post which itself was privatized in 2000, from June 2004 on, Postbank shares weretraded on the Frankfurt Stock Exchange and Deutsche Post kept the majority until September
2008, when almost 30% of this was sold to Deutsche Bank. 35 In Germany, however, thegovernment did not give a blanket guarantee for old savings as it is the case in Japan. Instead,deposits with Deutsche Postbank are insured by the German deposit insurer, since Deutsche
Postbank is a member of the Deposit Protection Fund of the Association of German Banks.

35

In January 2009, Deutsche Bank decided to further increae its ownership of Deutsche Postbank. For thehistory of Deutsche Postbank see http://www.postbank.com and Bundesministerium für Finanzen, (2005: 9).

20

Acknowledgments
We are indebted to Nobuyuki Tajiri, Yu Nishioki and Takahiro Yamada, Japanese Cabinet
Secretariat, Office for the Promotion of Privatization of Postal Services, as well as to Hideaki
Hamada and to Ryota Kojima from Financial Services Agency, Supervisory Bureau. Research
assistance by Fumio Hotta and Monika Bucher are gratefully acknowledged. Of course, the usual
disclaimer applies. Parts of this research were done while Vollmer was on leave at Kobe University.
He wants to thank Kobe University for its hospitality and the Fritz-Thyssen-Stiftung for financial
support.

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