FRBSF Economic Letter
2001-15; May 18, 2001
Japan's New Prime Minister and the Postal Savings System
Pacific Basin Notes. This series appears on an occasional
basis. It is prepared under the auspices of the Center
for Pacific Basin Monetary and Economic Studies within the FRBSF's
Economic Research Department.
On April 26, 2001, Junichiro Koizumi was elected Prime Minister of Japan
by the Parliament, winning a popular mandate to reform the ruling Liberal
Democratic Party (LDP) and lead the country out of a decade of economic
and financial distress. Koizumi is known as a maverick—a title of honor
he will richly deserve if his proposal to privatize Japan's Postal Savings
System (PSS) succeeds: It would represent the most significant and difficult
structural change in Japanese finance in the postwar period. The PSS accounts
for 34% of household deposits and currently holds about $2.2 trillion
in deposits, making it the largest financial institution in the world.
The PSS also sells life insurance, which represents about 30% of the Japanese
market. Postal deposits, postal life insurance premiums, and other sources
of funds support an extensive system of government intermediation finance
and programs referred to as the Fiscal Investment and Loan Program (FILP)
that target sectors of the economy. The FILP budget is large, equaling
10% to 11% of GDP.
This Economic Letter discusses the economics and politics of the
PSS from both a historical and a forward-looking perspective. How Japan
deals with the PSS and its associated institutions will reveal much about
whether Japan is capable of developing a modern financial system that
can return the economy to sustained growth and that can meet the challenge
of a rapidly changing population.
Japan's Postal Savings System
The PSS was established in 1875, reached maturity in the early 1950s,
and existed up to April 1, 2001. It was an official part of the FILP,
which is managed by the Ministry of Finance. The nearly 25,000 post offices
transferred the majority of deposits and a portion of life insurance premiums
to the Ministry's Trust Fund Bureau, which combined these funds with funds
from other sources (national welfare and pension premiums and government
bonds) and distributed them to government banks and other FILP-financed
entities. The FILP-financed entities provided subsidized funds to targeted
sectors of the economy.
The PSS and FILP were an important and large part of the old, or pre-liberalization,
financial regime. Moreover, two decades of financial liberalization did
not lead to reforms in these institutions; indeed, they became more prominent,
as Figure 1 shows. The single prominent period
of relative decline in postal deposits to total deposits in the latter
half of the 1980s reflected the shift of postal deposits to the rapidly
rising stock market that was part of Japan's "bubble" economy.
The PSS and FILP avoided reform for four reasons. First, they provided
significant advantages to the participants. Post offices relied almost
exclusively on teigaku time deposits, which provided a no-penalty
option to withdraw funds after six months to take advantage of interest
rate movements. As a result, teigaku deposits offered a higher
effective interest rate than any time deposit offered by private banks.
Post offices were more convenient, as their numbers exceeded those of
private bank branches in every prefecture for much of the postwar period.
Funds obtained through the FILP were subsidized, and many borrowers would
have been unable to obtain the same level of funding from the private
banking system. Second, the FILP as part of the budgeting process was
an instrument to maintain and enhance the political standing of the LDP,
since local governments and many sectors of the economy were dependent
to some degree on funds it provided. Third, the PSS and FILP were so large
and pervasive that reform was a daunting process at a minimum and, thus,
policymakers were willing to put PSS and FILP reform on the back burner.
Fourth, the PSS and FILP were immensely popular in Japan, criticized only
by a few academics, private banks, and on occasion, the Bank of Japan.
The FILP increased its popularity in the 1990s as funds allocated to business
and housing grew more rapidly than other FILP uses of funds, which mitigated
the credit crunch at private banks.
Consensus for reform
Two factors motivated reform of the PSS and FILP. First was the economic
and financial distress of the 1990s. In times of financial distress, the
PSS complicated Japan's government deposit guarantee system and provided
incentives to transfer private bank deposits to the PSS whenever the public
became concerned about the condition of the banking system. In fact, the
PSS in the early part of the 1990s encouraged disintermediation by advertising
the safety of postal deposits over private bank deposits.
Second was growing concern over projected demographic trends in Japanese
population, which are placing a premium on increasing the rate of return
on Japan's high savings rate. Population is projected to start declining
by 2008, and the dependency ratio (individuals 65 and over as a percent
of the working age population) is projected to increase significantly.
Increasing labor productivity through higher yield investment is the only
practical offset to a decline in the standard of living (income per capita)
that will occur under current conditions. Many would argue that much of
Japan's high saving has been wasted because of an inefficient financial
system and, more specifically, because of the large amount of funds collected
by the PSS and allocated by government financial intermediation.
In 1993, post offices were officially informed to cease appealing to
the fears of the public to attract deposits. In 1994, an agreement was
reached between the regulatory authorities that the PSS would set deposit
rates "close to" private bank deposit rates in an effort to reduce disintermediation.
These were not trivial reforms, but the most significant reform commenced
June 1998.
The emergence of the "new" PSS and FILP
As part of the June 1998 Laws to Reform Central Government Ministries
and Agencies, the formal relationship between the PSS and the FILP changed.
Starting April 1, 2001, postal deposits, postal life insurance premiums,
national welfare and pension premiums, and so on, are no longer provided
to special accounts or government banks through the Trust Fund Bureau.
The FILP-financed entities previously dependent on the Trust Fund Bureau
must raise their own funds in the form of (a) FILP-agency bonds without
a government guarantee, (b) FILP-agency bonds with a government guarantee,
or (c) FILP bonds issued by the Ministry of Finance, which essentially
represent general government debt. In fiscal year 2001, 20 entities previously
financed by FILP will commence selling bonds without a government guarantee;
this source of funds will provide only a small part of their funding,
and the remainder will come from Ministry bonds. The other entities financed
by FILP will continue to be supported by the government through the Ministry
of Finance. The new process will be officially referred to in the budget
as the Public Funding Mechanism; however, the term FILP will continue
to be used to describe the process of allocating funds.
As a result, the new PSS is not required to transfer funds to the Ministry
of Finance and for all practical purposes has become a stand-alone government
bank. In June 2000, the Ministry of Public Management, Home Affairs, Posts,
and Telecommunications announced a strategy to manage postal deposits.
The portfolio "in principle" should consist of 80% in "safe" assets (government
bonds, etc.), 5% in foreign bonds, 5% in foreign equities, and 5% in domestic
equities, and the remaining 5% in money market instruments. The plan to
hold 80% of postal deposits in government bonds and other safe assets
essentially turns a major part of the PSS into a "narrow" bank.
Real reform?
One could view these reforms cynically and conclude that nothing has
changed, especially since financial liberalization has been on the agenda
in Japan for over 20 years. A formal model developed by Cargill and Yoshino
(forthcoming) demonstrates that there is essentially no difference between
the old and new FILP systems if the PSS purchases bonds used to raise
funds for entities previously financed by FILP.
A more positive—and possibly more realistic—perspective emphasizes
four potentially important elements of reform. First, the new system will
be more transparent, and, because entities previously financed by FILP
will obtain funds from the capital market directly or indirectly, their
lending decisions and monitoring will be more market-sensitive. Second,
even though the initial offering of agency-type securities is small for
any one entity, they will still be market-sensitive and provide feedback
information for future reforms. Third, the PSS system's uses of funds
will become more market-sensitive. In the past, the PSS provided funds
that were lent at fixed interest rates. In the new PSS, funds will be
allocated to assets with market-determined interest rates. This may make
it more difficult to rely on teigaku deposits and thus narrow the
advantage postal deposits have over private bank deposits. Fourth, and
most important, the separation of the PSS from the FILP changes the balance
of political power. Combined, the PSS and FILP were a major economic and
political presence with substantial influence; separated, their influence
is reduced.
Practical and second-best solutions
Resolution of the problems of government financial intermediation in
Japan must incorporate economic, institutional, and political dimensions,
because the PSS and FILP are pervasive throughout Japanese economics and
politics. While an efficiency argument can be made that Japan needs to
reduce government financial intermediation and privatize the PSS, these
changes need to be adopted slowly. Western advice often fails to consider
the difficulty of shifting from a state-directed financial regime to a
more market-oriented financial regime. The following examples represent
some of the views that have been expressed in Japan as a means to reform
the FILP and PSS.
Government banks and enterprises. Each government bank and enterprise
should be evaluated in terms of a cost-benefit framework with methods
commonly employed to evaluate public projects. The objective is to place
each entity into one of three categories: the entity should be abolished,
the entity should raise a significant part of its funding in the capital
market, or the functions of the entity should be supported in a different
manner, for example, directly through the budget.
PSS. The first step might be to make the PSS a separate agency
independent of the Post Office and the Ministry of Public Management,
Home Affairs, Posts, and Telecommunications. Postal deposits would be
invested in government bonds, and the PSS would have the authority to
offer on a fee basis its considerable branching network to private banks,
securities companies, insurance companies, and other financial institutions
to sell financial products on their behalf to depositors. The extensive
post office network can then be used to bring an improved mix of financial
products to all areas of Japan. The second and more difficult step would
be the ultimate privatization of the PSS. A large postal savings system,
in the view of many observers, is inconsistent with financial liberalization.
Can Koizumi do it?
Most agree the PSS and FILP require significant reform if Japan is to
achieve a modern financial structure. The 1998 reforms set the process
in motion. But the process needs strong political leadership. It is too
early to predict the degree to which Koizumi will act on his proposal
to privatize the PSS, but if he is able to achieve political consensus
on privatization, even without a specific timetable, he would dramatically
change the direction of financial liberalization in Japan.
Thomas F. Cargill
Professor of Economics, University of Nevada,
and Visiting Scholar, FRBSF
Naoyuki Yoshino
Professor of Economics, Keio University, Tokyo
Reference
Cargill, Thomas F., and Naoyuki Yoshino. Forthcoming. The Postal Savings
System and the Fiscal Investment and Loan Program in Japan: Financial
Liberalization Dilemmas and Solutions. Oxford University Press.
Opinions expressed in this newsletter do not necessarily reflect
the views of the management of the Federal Reserve Bank of San Francisco
or of the Board of Governors of the Federal Reserve System. Editorial
comments may be addressed to the editor or to the author. Mail comments
to:
Research Department
Federal Reserve Bank of San Francisco
P.O. Box 7702
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