The Points of Contention Surrounding Postal Services Reform

Fellow, RIETI

The Council on Economic and Fiscal Policy has finally begun deliberating the issue of privatization of postal services. The three postal businesses (postal services, postal savings and postal life insurance) were separated from the central government in April 2003 as the public corporation Japan Post. However, as to how to privatize Japan Post, much remains undecided.

The banking industry, which has been oppressed by the postal savings business, immediately announced its own counterproposal. In this column I will compare and examine the postal business reform proposals currently on the table.

Why the postal businesses should be reformed

Why must the postal businesses be privatized in the first place? The answer to this question becomes easy to understand if we look at the issue from the following four points.

Firstly, "efficiency through competition." Once the businesses are privatized and begin to compete with the private sector, wasteful costs can be eliminated and the burden on taxpayers will decrease. If they remain state-owned, there will be no tension in their management and wasteful costs will balloon. This problem is not limited to the postal businesses but is common to the special public institutions, such as the highway public corporations, that Prime Minister Junichiro Koizumi's government has earmarked for privatization.

Secondly, "the effective use of the post office network." The nationwide network of some 25,000 post offices provides a high degree of convenience to users across the country, including those living in remote areas and isolated islands. Most parties involved in the privatization debate agree that the post office network is a public asset and should be used effectively.

Thirdly, the issue of "bloated public finance." Owing to the fact that they are backed by government guarantees, the public has funneled funds amounting to a staggering ¥350 trillion into postal savings and postal life insurance. Much of this money is invested in government bonds and bonds issued by Fiscal Investment and Loan Program (FILP) agencies, aggravating the nation's fiscal deficit and the inefficient management of these agencies. A situation where such a large amount of funds is distributed through public finance in the form of postal savings and postal life insurance is unprecedented in other countries and is abnormal. It has also been pointed out as being a major reason why the flow of private sector funds in Japan is distorted. The reason why the business community is actively calling for postal reform is because of a deepening sense of crisis over Japan's bloated public finance structure.

Fourthly, "the impact on the government bond market." Since the collapse of the bubble economy, a massive amount of government bonds has been issued as a result of more than a decade of economic stimulus measures and tax revenue shortfalls. The postal savings and postal life insurance schemes have been important underwriters of government bonds, and if they were to be scrapped in a single stroke, government bonds would be dumped and a government bond crash (a sharp rise in interest rates) would occur. Should that happen, it is highly likely that the Japanese economy will find itself in a serious recession. These effects must also be taken into consideration when reforming the postal services.

Comparing the various privatization proposals

In September 2002, the Advisory Council to Consider the Modalities of the Three Postal Businesses, a private advisory panel to Prime Minister Koizumi, drew up three proposals for the privatization of postal services. These form the starting point for future debate, so let us examine them from the four points mentioned above.

The first proposal calls for Japan Post to become a special company handling all three businesses while its stock is owned by the government.
This proposal would make "the effective use of the post office network" possible. It would also keep "impact on the government bond market" in check. However, it would not help correct Japan's "bloated public finance." If anything, should the special company be allowed to operate freely, postal savings and postal life insurance may become even larger than they are today. Also, because the government would continue to hold its shares, there would be little hope for "efficiency through competition." In other words, under this proposal, not only would there be little change from the present situation, but there is also the danger that it may further enlarge public finance.

The second proposal calls for Japan Post to be fully privatized while maintaining all three businesses, and for its stock to be sold on the market.
"Efficiency through competition" may be enhanced under this plan, as discipline would be exercised through private shareholders. The post office network would also be put to effective use. However, the distortions in Japan's public finance would not be corrected, and, as in the case of the first proposal, there is likelihood that this may even become aggravated.

The third proposal calls for the gradual abolition of postal savings and postal life insurance so that the privatized firm will focus only on the mail service.
Under this proposal, the economic objective of correcting "bloated public finance" could be achieved. Also, by doing away with postal savings and postal life insurance in stages, "the impact on the government bond market" could be eased. However, the problem is whether postal services alone can be profitable. "Efficiency through competition" with the private sector would no doubt increase, but without the profits of the postal savings and postal life insurance businesses, the mail business in its current state is wallowing in red ink. The Ministry of Public Management, Home Affairs, Posts and Telecommunications and Japan Post stress that the mail business alone cannot be profitable.

Furthermore, this proposal is also unclear as regards the "effective use of the post office network." The post office network does not exist solely for the mail business. The ability to use settlement services such as depositing and remitting small amounts of money at any window nationwide is also a major function of post offices. If post offices were to terminate such settlement services, it would greatly damage network functions. In order to effectively utilize the post office network, it would be desirable to maintain such settlement operations as remittances.

However, we should also take care to note that this does not mean that "postal savings and postal life insurance should remain as they are now."
The convenience for users is that they can receive settlement services such as depositing, withdrawing and remitting money at post offices nationwide. For example, if deposits, withdrawals and remittances to private bank accounts could be made from post offices, then postal savings (a system where the post office manages the assets) would not be necessary. In addition, the fact that the post offices are managing money is leading to "bloated public finance" and giving rise to negative effects.
When considering postal privatization, we need to make a distinction between the settlement services offered by post offices and the issue of asset management (bloated public finance).

For example, the proposal put forward by the Japanese Bankers Association is close to the third proposal, but it calls for setting aside a minimum amount of postal savings (about ¥55 trillion) for settlement services and abolishing such products as fixed-amount postal savings. This plan aims to retain the settlement services of the postal savings business while correcting the evils of bloated public finance.

The trap of simple privatization

Now let us sort out the points in question.

The direct effect of privatization is "efficiency through competition." At the same time, most parties involved in the debate would agree that "effective use of the post office network" includes not only mail services but also settlement operations (such as deposits, withdrawals and remittances).
When we consider the Japanese economy as a whole, it is necessary to correct the nation's "bloated public finance" structure and proceed with reforms that reduce the outstanding balance of funds managed through postal savings and postal life insurance.
However, drastic change would have "an impact on the government bond market" and bring down the economy, so the abolition of the postal savings and postal life insurance businesses would have to be done over time.

What I would like to point out in closing is that simply privatizing the three postal businesses would threaten to further distort Japan's economic system.

For example, what would happen if postal savings and postal life insurance were simply privatized and their managers given free reign? These gigantic privatized firms would develop profitable products and even more money would flow to postal savings and postal life insurance. Furthermore, if postal savings funds were allowed to be managed freely and were extended as loans to companies, it could lead to a mountain of nonperforming loans as this is an area where the postal businesses still lack experience.

Postal privatization needs to be pursued cautiously with appropriate restrictions and in stages so as to ensure that the nation as a whole will not go in the wrong direction.

April 20, 2004

April 20, 2004

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