The hottest political story on the planet is unfolding in Japan this very minute.

Having helped the banks dig out from their mountains of non-performing debt—the average for Japanese banks is now below the international average—Prime Minister Koizumi is on the verge of fulfilling his campaign promise of shifting government services to the private sector by implementing the final phase of a program that would entirely eliminate a Cabinet ministry. This program will go a long way to resolving long-standing complaints from both inside and outside the country about the government’s direct involvement in the banking and insurance industries, which distorts one of the world’s largest economies. In the process, it also will hobble the Construction Ministry’s source of funding for pork barrel projects, another bone of contention both in Japan and abroad.

Last month, Koizumi’s bill squeaked through the Lower House of the Diet by the slimmest possible margin. Anti-reform elements in his own party, the Liberal-Democratic Party of Japan, combined with the knee-jerk opposition to nearly knock off his proposal. To show that he is playing political hardball, Koizumi removed four LDP Diet members of their party administrative posts for voting against the measure.

The prime minister continues to put the screws to the opposition in his own party. The bill now is being deliberated by the usually irrelevant Upper House. If the bill fails to pass that chamber—and most observers say there’s a 50-50 chance of that happening—Koizumi has vowed to dissolve the Lower House and call for new elections. (By law, he can’t dissolve the Upper House.)

If that happens, the LDP hierarchy will not formally back the party members who voted against the bill in the new election. This could split and destroy the party that has governed Japan almost continuously for the past 50 years, unseat Koizumi, and bring the opposition into power. The LDP’s coalition partner, the New Komeito, is hedging its bets, saying that it would consider forming a coalition with the opposition. Thus, Koizumi is staking his political life and the life of his party on this bill.

The stakes are even higher on the other side of the fence. LDP Lower House member Yoji Nagaoka committed suicide Monday by hanging himself. Nagaoka belonged to a party faction opposed to Koizumi and the postal reform bill. After originally announcing his opposition to the bill, he later changed his mind and voted with Koizumi in the Diet. A magazine dubbed Nagaoka and several others a traitor for changing positions, and it is likely the other faction members hold an even lower opinion of him. His wife and friends say there was no other reason for him to take his own life.

This is as hard as political hardball gets, yet the world’s media is either ignoring, under-reporting, or misreporting a story that could have major repercussions both in Japan and abroad. And the Japanese media aren’t performing much better.

What does Mr. Koizumi want to do? Complete the privatization of Japan Post, a semi-public corporation that also offers savings accounts and sells life insurance.

Until 2003, the postal system was operated by Japan Post’s predecessor, the Ministry of Posts and Telecommunications, which was headed at one time by the prime minister’s grandfather and by Mr. Koizumi himself in 1992. He was anxious even then to streamline the ministry; in his first speech to ministry employees on his first day on of the job, Koizumi said he intended to reduce the number of postal ministry bureaucrats and make it more efficient

Here’s what his legislation would affect:

Japan Post

• Operates 25,000 post offices nationwide with 400,000 employees
• Has aggregate postal savings deposits of 214 trillion yen ($1.98 trillion), making it the largest financial institution in the world. This figure is equal to the deposits at Japan’s four largest banks combined. It also holds 33 percent of the nation’s time deposits.
• Holds the funds for 136 trillion yen worth of life insurance policies, more than a third of all life insurance policies nationwide.

Koizumi was selected to head the LDP (and therefore serve as prime minister) in 2001 on a reform program. His slogan during his campaign was, “What the private sector can do must be put in the hands of the private sector,” an idea not often overtly expressed in Japan. Koizumi’s political philosophy is similar in some ways to that of Ronald Reagan. (I hesitate to make this comparison because everyone carries their own emotional baggage about the U.S. president.) In addition to advocating small government, Koizumi became the first Japanese prime minister to send the Japanese army abroad after World War II when he dispatched troops to Iraq.

As explained by the Nikkei Shimbun, the pending legislation will do the following:

The government Council on Economic and Fiscal Policy approved the basic guidelines for postal privatization in September 2004. In April 2007, Japan Post will be split into four entities that will each handle different functions: postal savings, postal life insurance, mail delivery and post office management. The shares of the postal savings and postal life insurance arms are to be sold to the market by March 2017, thus completing the privatization of these two branches. Following privatization, the different branches will be charged the same taxes as private-sector companies. Postal savings and postal life insurance contracts will be separate, with the new contracts under the privatized entities no longer backed by government guarantees.

The Japan Times provides more details:

The bills stipulate post offices must be located “universally across the country,” meaning some 7,220 post offices in depopulated rural areas would be maintained. But post offices in urban areas may be consolidated into fewer entities.

To stay afloat, post offices would be allowed to undertake new businesses other than mail delivery, postal savings and life insurance.

Privatized financial spinoffs could deal in securities and investment trusts as well as “third-sector” medical insurance products like cancer insurance, while the mail-delivery spinoff could provide door-to-door delivery to overseas customers possibly via tieups.

Post offices would become like convenience stores, selling public transport and concert tickets, stationery and cellular phones, like in the Netherlands.

Money deposited before privatization would continue to be backed by a government guarantee. Deposits made to the privatized postal savings would be protected by Deposit Insurance Corp., which the privatized entity would be required to join like other financial institutions.

DIC would protect up to 10 million yen per person, the same as the current limit on postal savings. Postal life insurance taken out before privatization would also be fully guaranteed by the government.

The universal service would be maintained for mail delivery, but financial services may be cut. Postal savings and life insurance would have to go through the over-the-counter service company at post offices at least during the transition period.

If deemed unprofitable for post offices to provide financial services in depopulated areas, the rural post offices could receive returns on a fund that the holding company would be allowed to put up for a maximum 2 trillion yen by selling off shares in the postal savings and life insurance firms, effectively subsidizing these services. If the returns are not enough, some rural offices would probably drop financial services, as their universal provision is not mandatory.

Koizumi’s original legislation would have completely privatized Japan Post by 2007, and only universal postal delivery would have been guaranteed. This would not have passed the Diet, however, due to opposition within Koizumi’s own party, so he compromised to expand universal services to the postal savings and insurance entities. Also, the holding company may now buy back shares of the savings and insurance units after all the stocks are sold.

The Advantages

For years, governments and financial institutions overseas have complained about the savings and insurance arms of the Japanese postal system.

Government involvement has hindered the development of the Japanese financial system. Funds from savings and insurance deposits are used for inefficient public loan and investment projects. They are used to purchase government debt, making the ministry an underwriter of government bonds. The government also has often used the system’s funds to prop up share prices, distorting financial markets.

The beauty of privatizing the postal system is that tackles so many problems at once. It gets the government out of the banking and insurance business, forces banks to become more competitive, and takes away the funding source for so many of the Construction Ministry’s unneeded pork barrel projects.

The Disadvantages

The compromises Koizumi made to ensure that the bill would have a chance of passage creates concerns that full privatization will not occur, and that the new entities will be “godzilla companies” that could still be manipulated by the government behind the scenes. Government involvement would stifle competition. Already, Lawson’s convenience stores have switched from Yamato to Japan Post as an outlet for customers picking up parcel deliveries outside of business hours.

While I sympathize with these complaints, I think people should realize that “politics is the art of the possible”. The ideal legislation would not have passed the Diet, and I think this reform will ultimately lead to the government getting out of financial business entirely in the years ahead.

The Complaints

The media is complaining that Koizumi has not fully explained his measures to the public. Ironically, this is often done in the body of newspaper articles and editorials in which the writer explains the measures to the public. The public, if it is paying attention, should be aware by now of what the measures entail and what the stakes are.

While it is true that the Japanese government has never thought it was necessary before to provide the public with many explanations, I have never seen any government anywhere try to explain to the public such details as holding company operations and how its proposals would affect the bond market. I suspect the public would tune out very quickly.

Some are complaining that privatizing the postal system would inconvenience people who live in rural areas and the “weaker members of society”. Others think that competing mail systems would lead to confusion. Still others have the knee-jerk response that post offices are necessary, because, well, they’re just necessary.

The legislation includes provisions for universal services, however, so I doubt people are going to be inconvenienced. Politicians all over the world make a career of “expressing concern” about issues such as these, which H.L. Mencken referred to as “hobgoblins”. Also, the country already has competing mail systems in the parcel delivery sector, and that has not lead to confusion at all. Indeed, Yamato’s parcel delivery company handles 10 times the business of Japan Post, while Sagawa handles about 60%. This complaint seems groundless.

There is one point that everyone is missing, and that I’m surprised the government has not mentioned.

By the time the program is fully implemented in 2017, what need will there be for post offices at all?

The volume of mail nationwide is declining every year because of e-mail and cell phones. When Taro wants to write a love letter to Hanako, he sends a text message. Private companies already are handling more parcels than the government. My Internet service provider sends my monthly bill by e-mail. Are you receiving as much mail as you did 12 years ago?

Online banking and commerce are a reality, and by 2017, technological development will have likely rendered government-provided brick-and-mortar entities for delivering mail, selling insurance, and handling savings deposits over the counter irrelevant. Indeed, cash itself may be irrelevant by that time.

So the people who are complaining about this aspect of the program are either not paying attention to technology, or are using it as an excuse to conceal the real reasons for their opposition. Since they all have personal computers and cell phones, know about debit cards, and are aware of the changes that will occur because of their interface, ignorance of technology is not an excuse.

To be blunt, there is no reason to oppose the measure on the basis of policy other than the fact that the privatization scheme doesn’t go far enough. But the bill’s opponents are not free market libertarians. Far from it.

So why have events reached such a critical impasse? I’ll talk about that tomorrow.

LINKS
Informative article in the Washington Times

Left-of-center Asahi Shimbun editiorial demands an explanation

Analysis by Foreign Press Center, Japan

Lee Lewis analysis from the Foreign Correspondents’ Club of Japan. It’s odd that someone covering the Japan beat should think that postal privatization minister Heizo Takenaka is “merrily toeing the Koiziumi line”. Takenaka is an economist who likely wants to go further with privatization than Koizumi does.

Analysis by Edward Lincoln of the Brookings Institution. He’s unhappy because 100% privatization will not occur. He suggests the best method is for Japan Post to refuse new time deposits, which would mean all the accounts would expire in 10 years. Very practical, but as it would put everyone in the entity out of work, and they are former civil servants, this legislation would have as much chance of passage as a Hokkaido snowball on an Okinawa beach in August.

Roderick Seeman analysis