$3 TRILLION FOR YOUR THOUGHTS: JAPAN POST

C O N F I D E N T I A L SECTION 01 OF 02 TOKYO 004555

SIPDIS

SIPDIS

NSC FOR TONG
USTR FOR BEEMAN AND MEYERS
PARIS FOR USOECD
DOC FOR 4410/ITA/MAC/OJ/NMELCHER
TREASURY FOR IA/DOHNER, HAARSAGER, AND POGGI
PLEASE PASS TO FEDERAL RESERVE SAN FRANCISCO/A. MAEDA

E.O. 12958: DECL: 09/27/2017
TAGS: ECON EFIN PGOV JA
SUBJECT: $3 TRILLION FOR YOUR THOUGHTS: JAPAN POST
PRIVATIZATION SET TO BEGIN OCTOBER 1

REF: A. TOKYO 2716

B. TOKYO 1916

C. TOKYO 967

D. TOKYO 894

Classified By: Ambassador J. Thomas Schieffer for reasons 1.4 b/d.

Summary
--------------

1. (C) Japan Post -- an institution with assets comparable
to the size of China's GDP -- begins a ten-year privatization
October 1. The privatization directly affects U.S.
commercial interests in banking, insurance, and express
delivery services, and its sheer size means it is widely
expected to have an impact on international and domestic
Japanese financial markets. Most immediately, a complex
operational transition looms, and any mistakes could damage
future reform efforts in other areas. End Summary.

Three Trillion Reasons to Care
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2. (SBU) Japan Post, a government-run public corporation with
almost $3 trillion in banking and insurance assets, 24,800
post offices, and 260,000 employees, will be split into six
entities October 1, marking the beginning of a ten-year
privatization. The process will result eventually in the
full sell-off of Japan Post's banking and insurance arms
(collectively the world's largest financial institution) and
partial privatization of its delivery services. Ref A
provides a detailed description of the stakes, players, and
mechanics of the process.


3. (SBU) The aim of the privatization is to free from
Japanese government control Japan Post's almost $3 trillion
in assets. Those assets -- roughly the size of China's GDP
-- have been invested primarily in low-yielding Japanese
government and municipal bonds, where they have served as a
source of cheap capital for public works. Allowing the
market, rather than politics, to allocate those resources
could raise capital productivity and help transform Japan's
economy.


4. (SBU) Market allocation also threatens entrenched
interests within the ruling Liberal Democratic Party (LDP)
that have long depended on public works monies and support
from co-opted "special postmasters" to turn out the rural
vote. Those rural constituencies have been an imporatnt
factor in the ruling party's decades-long primacy in the
Diet. In pushing postal privatization as a signature reform,
former Prime Minster Koizumi sought to transform both Japan's
economy and its ruling party.

U.S. Interests in the Short Term
--------------

5. (C) In the financial markets, analysts initially suggested
Japan Post's transition could result in immediate gains for
stocks, as money might flow quickly from Japanese bonds to
global equity markets, but closer inspection of bank product
maturity dates led to the prediction that funds will flow out
over several years (Ref D). Nonetheless, the new postal bank
will be nearly the size of its three closest Japanese
competitors combined, giving it substantial market power and
the potential to affect Japanese -- and even international --
market stability. That the bank has yet to articulate a
persuasive business strategy has created some anxiety among
analysts. A detailed analysis of the bank's transition is

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provided septel.


6. (C) In services markets, Japan Post's transition will
directly affect U.S. banking, insurance, and express mail
delivery companies that compete with it. Sustained U.S.
government and industry advocacy has ensured many of Japan
Post's regulatory and tax advantages will be eliminated
October 1, but reasons for concern remain. The possibility
of cross-subsidization among the new postal entities, doubts
about their ability to comply fully with standards applied to
the private sector, as well as whether the new entities will
be considered "too big too fail" are all areas of potential
conflict. Moreover, what might at first sight seem like
minor issues, such as discriminatory parking and customs
treatment in the processing of express mail, can constitute
material competitive disadvantages for FedEx, UPS, and other
private firms.

Transition Challenges
--------------

7. (C) The complexity of Japan Post's operational transition
also looms. One industry observer with direct knowledge of
Japan Post's information technology systems told the Embassy
that upgrading mission-critical portions of the systems (such
as transactions among the new entities and regulatory
compliance) required more than twice the "development steps"
needed for the privatization of telecommunications monopoly
NTT. No one has suggested to the Embassy the transition is
in trouble, but Japanese officials acknowledge privately
their challenges. One official reported the Financial
Services Agency has given priority to efforts aimed at
preventing consumer problems during the transition.


8. (C) Even minor glitches in the complex transition could
provoke controversy, given Japan Post's prominence. The
opposition Democratic Party of Japan (DPJ) turned pension
records-keeping mistakes into a decisive issue before July
2007's Upper House elections, and one DPJ Diet member told
the Embassy the party has considered how to use any postal
transition problems to its advantage. Economically, any hint
of favoritism in the government's response to transition or
compliance problems would likely trigger complaints from
private industry, domestic and foreign. Significant public
complaints stemming from Japan Post's privatization could
also serve to discredit or forestall future needed reforms of
Japan's economy.
Schieffer