THE VISION THING: POLTICAL WILL DISSIPATED FOR HIGH-QUALITY POSTAL PRIVATIZATION, SAYS FORMER POSTAL HEAD

C O N F I D E N T I A L SECTION 01 OF 03 TOKYO 001916 SIPDIS SIPDIS USTR FOR CUTLER, BEEMAN, AND MEYERS PARIS FOR USOECD DOC FOR 4410/ITA/MAC/OJ/NMELCHER TREASURY FOR IA/DOHNER, HAARSAGER, AND POGGI E.O. 12958: DECL: 04/26/2017 TAGS: EFIN ECON PGOV JA SUBJECT: THE VISION THING: POLTICAL WILL DISSIPATED FOR HIGH-QUALITY POSTAL PRIVATIZATION, SAYS FORMER POSTAL HEAD Classified By: CDA Joseph Donovan for reasons 1.4 b/d. Summary -------------- ¶1. (C) While the privatization of Japan Post is irreversible and will commence as planned on October 1, the political will and vision behind it dissipated once Prime Minister Abe took office, former Japan Post (JP) President Masaharu Ikuta told ECOUNS April 26. The change in political atmosphere has resulted in a reversal of some planned reforms to the system, with potentially negative effects on JP's competitiveness, compliance, and the Japan Post Corporation's eventual initial public offering. Ikuta also speculated that the current JP president was moving backwards in efforts to make JP's culture more like a private sector company, and that he may be less friendly toward private company access to JP's postal network -- a key interest of U.S. business. Ikuta said that the main U.S. concern moving forward should be with promoting a healthy privatization. End summary. Ikuta Recently Pushed Out of Japan Post -------------- ¶2. (C) Masaharu Ikuta was replaced on April 1 as president of Japan Post by Yoshifumi Nishikawa, who is also president of JP's successor entity, the Japan Post Holding Company. The end of Ikuta's tenure, which occurred six months earlier than expected, was publicly rationalized as a way for Nishikawa to coordinate the privatization transition as smoothly as possible, but there has also been speculation in the media that the dismissal was related to Ikuta's eagerness to reform. Ikuta met ECOUNS April 26 to discuss how privatization is progressing. (Comment: While Ikuta's comments have the smack of sour grapes, we report them because he was in a position with unique perspective on the process, as well as the competitive abilities -- and inabilities -- of Japan Post's financial institutions.) Japan Post Privatization Will Go Forward... -------------- ¶3. (C) Preparations for Japan Post's (JP) privatization are going well, Ikuta told ECOUNS April 26, and he had no fears that the October 1 start date will be delayed. Moreover, based on preparations underway, Japan Post's new insurance and banking entities will be ready to perform under the same regulatory environment applied to the private sector on October 1. (Comment: In a subsequent phone call, Ikuta backtracked, saying the October 1 date had been inviolable for him, but that he sensed Nishikawa might consider a delay. We doubt there will be any delay.) ...But Political Atmosphere Has Changed -------------- ¶4. (C) The political atmosphere surrounding Japan Post's privatization has changed, however, and while the privatization itself cannot be reversed, the structural transformation possible from JP's privatization may not be realized. The whole process has become more subject to political pressure, lamented Ikuta, which will have deleterious effects for the creation of a competitive market. ¶5. (C) Recalling the push to enact the privatization legislation, Ikuta described former Prime Minister Koizumi as a real Japanese statesman -- perhaps the best in fifty years -- with a modern vision and a tenacity for moving forward with policies he believed in despite determined opposition. Everyone could understand Koizumi's vision, he added, and it was so clear that there was no gap between Koizumi's and Ikuta's opinions about how to execute the privatization, even without explicit conversation. Switching to the present, Ikuta implied that Koizumi held him in similar regard, saying that Koizumi had told him that he was sorry Ikuta had been relieved of his post. ¶6. (C) After Prime Minister Abe took control, however, "things got fuzzy." Ikuta said it was difficult to say if Abe's thoughts on postal privatization were good or bad, because, even as president of Japan Post, Ikuta never heard TOKYO 00001916 002 OF 003 Abe's concept of how the privatization should proceed. Despite meeting Abe several times to discuss the process, Ikuta "had no idea of his vision." Postal Rebels and Special Postmasters -------------- ¶7. (C) Ikuta was particularly critical about PM Abe's reinstatement of the "postal rebels," the Liberal Democratic Party (LDP) members who former PM Koizumi expelled over their resistance to the privatization plan. Japan Post's current president, Yoshifumi Nishikawa, tends to bow to political pressure, stated Ikuta. Privatization will go on, he continued, but it will not have the competitive market conditions a less politically affected process would produce. ¶8. (C) "I never listened to political voices, but Nishikawa is entirely different," stated Ikuta, who offered Nishikawa's treatment of special postmasters as an example. Around 130 years ago, the Japanese government turned to prominent families across the country to rapidly build a postal network through offices run out of their houses. That policy had been successful, but still today there are about 19,000 special post offices, to which JP pays rent and other costs. The special postmasters are semi-independent and difficult to manage in the current structure, and their long-term ties to the LDP's rural voting machine make them politically powerful. ¶9. (C) Ikuta stated that, in order to enhance JP's competitiveness, he made the tough decision to reform the special postmasters' network by creating a substitute network governed through 50-60 regional postal hubs. ONE of Nishikawa's first actions was to reverse that decision, which was welcomed by some conservative members of the Diet, but which presented a serious issue for JP's competitiveness. Continuation of the special postmasters system also jeopardized the privatized entities' ability to ensure compliance with relevant laws, because the special postmasters' association governing body meets about ONE hundred times a year to comment on postal policies, and regional sub-bodies meet once a month -- time that those postmasters cannot be in their offices overseeing operations. Some of that time, he added as an aside, is spent drinking and speaking about other matters, like drumming up votes for the LDP. JP pays for this, as well as other travel expenses. Macroeconomic Impact -------------- ¶10. (C) At a macroeconomic level, Nishikawa's actions are putting a brake on the fundamental structural reforms possible through postal privatization, summarized Ikuta. It was essential for Japan and for Japan's role as an engine of growth for the world economy that JP privatization be successful so that JP could put its assets into more productive investments than government instruments. Currently, JP's assets earn one-third to one-half less than those of the private sector. Under the new arrangements, the JP entities "will not be as strong as they should be." The market is not political, and will judge the results accordingly, he said, implying that a failure to reorganize the special postmaster system and undertaking other reforms he championed will undermine Japan Post Corporation's initial public offering, and that could have global implications. New Products and Playing Favorites -------------- ¶11. (C) Regarding the U.S. government's competitive concerns about postal privatization, Ikuta stated that he had been in favor of opening the postal network to sales from outside companies, recognizing the limits of JP's current personnel to develop products that could compete. The system he envisioned would have allowed any company to approach the new postal network company to propose a distribution relationship, about which the network company would have made a recommendation to its parent holding company. Nishikawa, he speculated, might give JP's banking and insurance arms a primary role, which would likely reduce the probability for TOKYO 00001916 003 OF 003 collaboration, as they would see the outside companies as competitors. (Note: The American Chamber of Commerce in Japan has actively lobbied for JP to open up access to the postal network as a "win-win" measure that would generate income for JP while alleviating level playing field concerns.) ¶12. (C) Nishikawa also made a pitch for JP to be allowed to develop limited new products immediately after privatization, explaining them as symbolic of a changed company and as necessary to transform JP's culture to that of a private firm. He also noted, however, that there had been a dramatic decline in JP's life insurance business over the past several years (due, largely, to more innovative products from U.S. companies),and that increases in interest rates had led many Japanese postal savers to shift their savings elsewhere. Ikuta noted that this was in part a healthy develoment indicative of economic recovery. However, he said Nishikawa was determined to put the brakes to this trend, and this would influence him to introduce new products sooner, especially in banking. ¶13. (C) Finally, Ikuta relayed concerns he had heard from old colleagues about President Nishikawa's style and effectiveness in managing cultural change at Japan Post. Ikuta said he had set out to change JP's bureaucratic culture, and he had strongly encouraged a very frank and active exchange of views among employees, regardless of rank. He had maintained an open door policy: any employee could email him with concerns, and his senior management meetings had run four to five hours, as members debated the best way forward. Nishikawa, in contrast, was making JP "more bureaucratic than the bureaucracy." His "tough gatekeeper" of a chief secretary tightly controlled access to Nishikawa, and pro forma management meetings lasted just thirty minutes. As a former banker, Nishikawa was also favoring the postal bank over JP's other entities. On the contrary, Ikuta believed that the insurance company was most in danger, because it had the least competitive products compared to the private sector. Comment -------------- ¶14. (C) Ikuta dislikes Nishikawa, and clearly resents being pushed out of the Japan Post presidency six months early. His comments on resistance to fundamental change, however, track with the smattering of public statements made by others involved in the process. And Ikuta's description of Abe's lack of vision on privatization corresponds with others' perception of Abe's disengagement from economic reform. If true, the deleterious effects on the quality of privatization would be an example of how the slowdown in Japan's reform momentum has tangible effects on the economy, despite the continued progress we see toward the October 1 launch of Japan Post's privatization. DONOVAN