JAPAN POST: NEW PRODUCTS NECESSARY FOR IPO, SAYS

C O N F I D E N T I A L SECTION 01 OF 03 TOKYO 001091 SIPDIS USTR FOR AUSTR CUTLER, BEEMAN, AND HOLLOWAY NSC FOR LOI TREASURY FOR IA/WINSHIP AND FOSTER PARIS FOR USOECD E.O. 12958: DECL: 05/13/2019 TAGS: EFIN ECON PGOV JA SUBJECT: JAPAN POST: NEW PRODUCTS NECESSARY FOR IPO, SAYS POSTAL COMMITTEE CHAIR REF: A. TOKYO 781 ¶B. TOKYO 706 ¶C. TOKYO 617 ¶D. TOKYO 616 ¶E. TOKYO 555 Classified By: CDA James Zumwalt for reasons 1.4 b/d. Summary -------------- ¶1. (C) For the initial public offerings of Japan Post Bank and Japan Post Insurance to be successful, the postal financial entities should be permitted to issue new products, Postal Services Privatization Committee (PSPC) Chairman Naoki Tanaka told emboffs May 13. Tanaka said he understands some of the new products will draw strong criticism from the U.S., but U.S. actions in the wake of the global economic downturn have blunted the USG message on privatization and weakened U.S. influence on Japanese politicians. Tanaka said postal privatization is entering a difficult phase and could become a "main theme" of political realignment following general elections that must be held by October. Emboffs pushed back on these points and Tanaka agreed continued input from U.S. companies, as well as the U.S. Government, is welcome and valued as Japan Post's privatization continues. End summary. Level Playing Field Concerns Reiterated -------------- ¶2. (SBU) Economic Minister-Counselor (EMIN) opened the May 13 meeting by congratulating Naoki Tanaka on his reappointment as Chairman of the Postal Services Privatization Committee (PSPC). EMIN then laid out long-standing U.S. concerns -- noting they are held at the highest levels of government -- that a level playing field be established before Japan Post Insurance (JPI) is allowed to offer any new or altered products, as well as continued U.S. concerns about unequal treatment in the area of express delivery. PM Aso and Personnel Changes -------------- ¶3. (C) "There is no reason for congratulations," Tanaka quipped, saying the chairmanship is a burden he "could not escape." Prime Minister Aso's gaffes about postal privatization raised the temperature of the issue, he explained, and focused people's attention on the future of the PSPC. If Aso had appointed anyone else as PSPC Chair, it would have been seen as changing course on former PM Koizumi's signature reform, and Koizumi may have become more publicly critical. "Aso is afraid of that kind of anger," said Tanaka. ¶4. (C) Moreover, another contentious personnel turnover will soon affect postal privatization. Tanaka said sometime during the summer the Japan Post Holdings Group (JPH) CEO will be changed. Media have speculated current Japan Post CEO Yoshifumi Nishikawa will be forced out due to differences with Minister of Internal Affairs and Communications Kunio Hatoyama over the disposition of Japan Post assets (ref A),a situation which could lead to a former postal bureaucrat -- and Hatoyama protege -- taking the helm at JPH. Tanaka downplayed the possibility of a former bureaucrat becoming CEO, noting "sounds from the PM's Office" that "another influential businessman" will be brought in "to run Japan Post like a private-sector company." The Kantei is reaching out to identify experienced business figures for the job. Prime Minister Aso, he added, understands what would happen if a former bureaucrat is allowed to ascend to the post. Not only would it send an anti-reform message about the privatization, it would become a factor in "the decomposition of" the ruling Liberal Democratic Party (LDP). Postal Privatization and Political Realignment -------------- - ¶5. (C) Postal privatization is entering a difficult phase, TOKYO 00001091 002 OF 003 said Tanaka, something which will be complicated by the current political situation. Noting upcoming elections, Tanaka stated it is likely neither the ruling LDP nor opposition Democratic Party of Japan (DPJ) will achieve a clear victory, further "distorting" the ability of the government to make decisions. Without political realignment, he concluded, "paralysis" would ensue. ¶6. (C) In that situation, postal privatization will emerge as a "main theme of realignment," said Tanaka. Even though former PM Koizumi is retiring from politics, his ideas about reform have a legacy in the LDP and even in the DPJ. Those politicians who support economic liberalism will use Japan Post as a flag around which to rally. IPOs and New Products -------------- ¶7. (C) Against this high-profile political backdrop, Japan Post Bank and Japan Post Insurance are moving toward their initial public offerings (IPOs). For the IPOs to be successful, Tanaka argued, the postal entities should be permitted to introduce new product lines. ¶8. (C) Tanaka said he understands the issuance of some new products will provoke strong criticism from the U.S. "But frankly," he continued, "voices from the U.S. government will not penetrate the consciousness of Diet members." Capital injections into U.S. companies, along with other U.S. government interventions in the market in the aftermath of the global financial downturn, have blunted the U.S. message on privatization while "the influence of the U.S. government with politicians has weakened." The downturn has challenged free-market assumptions about how to manage the economy, and in such situations, pragmatism drives policy. ¶9. (C) Three to four years ago, continued Tanaka, the free-market logic that wholly government-owned postal financial entities should not be allowed to issue any new products had legitimacy, but "that can't be expected for the time being." The potential gains from the IPOs, in corporate governance and the elimination of inefficiencies, are no longer seen as sufficient. Therefore, said Tanaka, in order for the IPOs to be successful, analysts and potential investors must be able to see a new product track record for Japan Post Bank and Japan Post Insurance. ¶10. (C) Pressed about the ability of Japan Post Insurance to comply with the regulatory requirements imposed on its private sector competitors -- and about the potential bilateral fallout from the situation -- Tanaka acknowledged any moves towards new products would be contested by domestic and foreign competitors, and that the PSPC would need to scrutinize applications on a case-by-case basis for their effects on market competitiveness. ¶11. (C) Turning to Japan Post Insurance's moves toward issuing a cancer product, Tanaka said new products should not become a large portion of JPI's portfolio. He allowed that, while JPI has good access to the market, it may be miscalculating its ability to produce a competitive product in an innovative field. Any permission granted for new products therefore would be conditional and could be revoked if the product turned out not to be profitable. Nonetheless, he said, from a consumer's point of view, more choice would be a positive development. ¶12. (C) Those competing factors are all the more reason for the PSPC to examine applications closely and on a case-by-case basis, said Tanaka. The PSPC will need to discern the products' prospects and ability to create a track record toward a successful IPO. He strongly encouraged the U.S. government to participate in hearings that the PSPC will hold regarding any applications received and stated U.S. industry will be afforded the opportunity to comment. TOKYO 00001091 003 OF 003 Non-Payments Report -------------- ¶13. (SBU) Tanaka stated the PSPC will consider a report, which the Public Successor Corporation is now compiling, on the pre-privatization postal insurer's failure to pay certain claims and its underpayment of other claims. He stated the PSPC will be transparent in its examination of the issue and will make the report public. Comment -------------- ¶14. (C) Tanaka is an influential economic and foreign policy thinker with close ties to the ruling party and a personal relationship with former PM Koizumi. He has been a strong proponent of economic reform and deregulation. His candid comments on the political situation reflect the worsening political climate for economic reform in the aftermath of the global financial crisis. ZUMWALT