Identifier
Created
Classification
Origin
09TOKYO555
2009-03-12 09:08:00
CONFIDENTIAL
Embassy Tokyo
Cable title:  

JAPAN POST'S PRIVATIZATION: DEALING WITH THE NEXT

Tags:  EFIN ECON PGOV JA 
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C O N F I D E N T I A L SECTION 01 OF 05 TOKYO 000555 

SIPDIS

USTR FOR AUSTR CUTLER, BEEMAN, AND HOLLOWAY
PARIS FOR USOECD

E.O. 12958: DECL: 03/11/2019
TAGS: EFIN ECON PGOV JA
SUBJECT: JAPAN POST'S PRIVATIZATION: DEALING WITH THE NEXT
STEPS

REF: A. 07 TOKYO 2716

B. 07 TOKYO 4658

C. 08 TOKYO 3315

D. STATE 3451

E. TOKYO 176

F. TOKYO 295

G. TOKYO 335

H. TOKYO 387

Classified By: Charge James P. Zumwalt for reasons 1.4 b/d.

Summary
-------
C O N F I D E N T I A L SECTION 01 OF 05 TOKYO 000555

SIPDIS

USTR FOR AUSTR CUTLER, BEEMAN, AND HOLLOWAY
PARIS FOR USOECD

E.O. 12958: DECL: 03/11/2019
TAGS: EFIN ECON PGOV JA
SUBJECT: JAPAN POST'S PRIVATIZATION: DEALING WITH THE NEXT
STEPS

REF: A. 07 TOKYO 2716

B. 07 TOKYO 4658

C. 08 TOKYO 3315

D. STATE 3451

E. TOKYO 176

F. TOKYO 295

G. TOKYO 335

H. TOKYO 387

Classified By: Charge James P. Zumwalt for reasons 1.4 b/d.

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

1. (SBU) Seventeen months into the ten-year privatization of
Japan Post -- whose operations included mail delivery, the
world's largest bank, and Japan's biggest insurer -- a major
milestone is coming into view. The initial public offerings
(IPOs) of Japan Post Bank and Japan Post Insurance could
occur as early as 2010. Ongoing preparations for the IPOs
are highlighting sometimes conflicting U.S. interests in the
process. To manage the issue effectively, the Embassy
believes we need to address specific questions arising from
the IPO preparations and refine our core message. End
summary.

Privatization Process Underway
--------------

2. (SBU) On October 1, 2007 Japan Post, a government-run
corporation with around $3 trillion in banking and insurance
assets, 24,800 post offices, and 260,000 employees began a
ten-year process of privatization. It was split into six
entities: a holding company; new insurance, banking,
delivery, and postal service entities directed by the holding
company; and a bridge "successor corporation" for holding
pre-existing, government-guaranteed savings deposits and
insurance contracts. According to the postal privatization
laws passed in 2005, the GOJ must sell all of its stock in
the insurance and banking entities within a ten-year period,
as well as two-thirds of its stock in the holding company,
leading to the full privatization of the insurance and
banking operations and the partial privatization of postal
delivery and service units.


3. (SBU) Seventeen months into that ten-year process, a major
milestone is coming into view: the Japan Post Holding
Corporation is eyeing initial public offerings (IPOs) for
Japan Post Insurance and Japan Post Bank as early as 2010.
The date can be postponed; timing of the IPOs will depend on

a number of factors, including prevailing economic
conditions, the stock market, and the postal institutions'
internal transformation. Nevertheless, preparations are
underway.


4. (SBU) The GOJ has a significant economic incentive to
bring the postal financial entities to market as quickly and
as profitably as possible. At nearly 180 percent, the ratio
of government debt to GDP is the highest among OECD
countries, and the greater the market valuation of those
entities' public offerings, the more resources Japan's
government will have at its disposal to reduce its debt
burden or increase its fiscal outlays.

Weighing U.S. Interests
--------------

5. (SBU) Japan Post's privatization presents economic and
political reform opportunities (ref A),but also poses
potential concerns for U.S. interests. Those interests
include ensuring U.S. companies are not disadvantaged
competitively during the transition, improving Japanese
regulation of the postal entities, and fostering a successful
privatization.


TOKYO 00000555 002 OF 005



6. (SBU) Simply put, it is not in the U.S. interest for the
privatization to fail. A failure of the privatization -- or
even a Japanese perception of failure -- would discourage
reform of other Japanese state-owned institutions and set
back the long-term restructuring necessary for Japan to
revitalize its economy and play a role as a global partner of
the United States. A failure of or freeze in the
privatization process could also put U.S. companies into a
nightmare scenario: long-term competition with wholly
government-owned entities whose pre-privatization legal
restrictions on expansion have been lifted, but which are not
subject to the full demands of a private sector existence.


7. (SBU) Recent preparatory actions by Japan Post Insurance
to apply for a new cancer insurance product license (refs
D-H) highlight the risks to U.S. companies. Insurance
industry representatives report robust Washington and Embassy
advocacy appears to have stalled Japan Post Insurance's
application. However, the issue has only receded temporarily
and will almost certainly reappear within the year.


8. (C) The USG has long held the position the postal
financial entities should not be allowed to offer new or
altered products until equivalent conditions of competition
are established between the postal bank and insurer and their
private sector competitors. With equivalent conditions of
competition enshrined as a principle in Japan's postal
privatization laws, and (until now) with the IPOs years in
the future, that message has served well to guide advocacy
efforts. However, with the coming IPOs moving to the front
of the privatization timeline, that straightforward and
conceptual standard has become more difficult to maintain.
Embassy Tokyo therefore believes a refined interagency
position is needed to manage postal privatization effectively.

Key Issues
--------------

9. (C) For some issues, the path forward is clear. Ensuring
Japan Post Bank and Japan Post Insurance are held to the same
regulatory standards as private companies, for example, not
only eliminates the Japanese postal companies' unfair
competitive advantages but strengthens the soundness of
Japanese market regulation. Similarly, eliminating
cross-subsidization between postal entities simultaneously
removes a competitive concern and increases regulatory
transparency. In the longer term, improving the transparency
and soundness of regulation should contribute to the success
of the postal entities' IPOs and broader postal privatization.


10. (C) For other issues, U.S. interests can be more
conflicted. The most pressing example revolves around
whether government ownership of Japan Post Bank and Japan
Post Insurance constitutes an unfair competitive advantage
and therefore should preclude the approval of new products
prior to their IPOs. Technically correctly or not, Japanese
regulators and the Postal Service Privatization Committee
(PSPC),a quasi-governmental body of experts that guides the
postal privatization process, have characterized the issue as
a question of whether government ownership confers an
"implied government guarantee" on Japan Post Bank and Japan
Post Insurance.


11. (C) For some Japanese officials, the issuance of new
products speaks to the very success of the privatization
process itself. Those officials argue Japan Post Bank and
Japan Post Insurance must demonstrate the ability to launch
new products prior to their IPOs to show market analysts they
can operate like private companies. If the postal entities
are not allowed to show their potential for generating
profits in the future, they assert, the entities' will be
undervalued in their IPOs, with negative fiscal and political
ramifications for the Japanese government.

TOKYO 00000555 003 OF 005




12. (C) In contrast, a senior U.S. insurance industry
representative in a private exchange with emboffs recently
floated the idea that Japan Post Bank and Japan Post
Insurance should not have their IPOs until shortly before the
ten-year privatization period ends in 2017. He argued the
entities' competitive advantages stemming from government
ownership will not disappear until the GOJ has completely
divested its shares and that the postal entities should
therefore not be allowed any new or altered products in the
next eight-and-a-half years.


13. (C) Finally, there are issues that bear on whether
equivalent conditions of competition have been achieved --
and therefore whether new products should be approved -- but
that are the unique legacies of postal privatization and that
likely cannot be changed without reformulating the laws
underlying the process. The re-insurance contract between
Japan Post Insurance and the "successor corporation," which
provides a revenue stream to Japan Post Insurance from its
pre-privatization business, is one example. The modified way
in which Japan Post Insurance received its insurance license
is another. Only judgment can resolve whether those features
fall outside "equivalent" competitive conditions, because
barring changes to the underlying legal framework, they will
remain in place throughout the ten-year privatization period.
The re-insurance contract, for example, will disappear only
when the last policyholder of a pre-privatization product
dies -- decades from now.

Domestic Politics Again a Factor
--------------

14. (C) Complicating the situation is an accelerating
re-politicization of postal privatization. Liberal
Democratic Party (LDP) politicians are increasingly involved
in what had become a largely technocratic process after the
2005 "postal" Lower House election. Even though in 2007
former PM Abe re-instated several "postal rebels," whom
Koizumi had ejected from the party for their objections to
the privatization, Abe insisted they pledge to support
privatization as a condition of their re-admittance to the
party. That insistence appears to have kept the issue
submerged during Abe's and former PM Fukuda's terms, but
political intervention in the privatization has surfaced more
and more under PM Aso.


15. (C) For example, Aso muddied the waters with
controversial comments on the postal entities' IPOs in
November 2008. Minister of Internal Affairs and
Communications (MIC) Kunio Hatoyama subsequently announced he
would block the planned sale of Japan Post property,
pilloried Japan Post Holdings Company management for its
plans to redevelop Tokyo's historic central post office, and
reportedly suggested to a Diet committee what kinds of
product applications Japan Post Bank and Japan Post Insurance
should develop. Aso jumped in again in February, announcing
he had been opposed to privatization at the time PM Koizumi
pushed its enactment. He then back-tracked, provoking both
pro- and anti-reform members of the ruling party.


16. (C) Despite some recent public actions by former PM
Koizumi to support his signature reform, it is unclear which
direction the current LDP leadership will take. Late in
2008, an LDP project team was appointed to review
privatization and seek compromises that would mitigate
intraparty conflict. The team recently submitted a paper to
the PSPC in advance of its three-year review of
privatization. Although the paper reportedly avoided major
recommendations to alter the structure of privatization,
media sources suggest it did include specific recommendations
that Japan Post Insurance and Japan Post Bank be allowed to
market new cancer insurance and loan products.

TOKYO 00000555 004 OF 005




17. (C) If prospects for postal privatization are uncertain
under the LDP now, an opposition Democratic Party of Japan
(DPJ) victory in the coming Lower House election could throw
the process into disarray. The DPJ depends on a voting block
with the small People's New Party (PNP) to control the Upper
House, and the PNP's one real issue is opposition to postal
privatization. The DPJ, therefore, has backed a bill to
"revise" or "freeze" postal privatization four times since
2007 (ref B).

Next Steps
--------------

18. (C) Three near-term events will suggest the direction
postal privatization will move over the next year. First,
the term of PSPC members ends March 31. Naoki Tanaka, a
long-time think tank expert and close associate of reformist,
former PM Koizumi, has chaired the PSPC. Who is chosen to
succeed him and his colleagues could speak volumes about
further political intervention in the privatization.


19. (C) Second, the PSPC is slated to release its three-year
review of postal privatization around the end of March or
beginning of April. The PSPC has solicited opinions from
stakeholders for months, including from U.S. industry, and
also received the LDP project team's report. Summary minutes
from a recent PSPC meeting indicate the three-year review may
recommend the Financial Services Agency (FSA) and MIC
consider government ownership of the postal entities as not
constituting an unfair competitive advantage when assessing
new product applications.


20. (C) Third, given Japanese perceptions the postal entities
must develop new products to enhance their IPO values, Japan
Post Insurance is unlikely to abandon plans to apply for a
new product license. No one knows when it might submit an
application, but the time required to secure a license and
roll out a product means the postal insurer would likely
start the process at least a year prior to an expected IPO.


21. (C) Developments at the PSPC or a new product application
could therefore present challenges to U.S. interests over the
coming months. Long-term we will want to manage those
challenges to avoid 1) a stalled process where Japan Post
Bank and Japan Post Insurance are issuing new products, but
remain government-owned; and 2) a failed process that
discourages further reform.


22. (C) In the short-term, we will most likely need to deal
with the question of government ownership and its
relationship to approvals to new products. What we want to
avoid is finding ourselves at an impasse over new product
applications that creates prolonged bilateral tensions with
negative fallout, no apparent exit, and heightened chances of
either a stalled or failed process. One of our key tasks,
therefore, is to weigh the acute competitive concerns of U.S.
firms against the long-term threats of a stalled or failed
privatization.


23. (C) One possibility in considering next steps is the
formulation of more specific, graduated measures we expect
Japan to implement in its efforts to establish equivalent
conditions of competition, including (or not) the postal
entities' IPOs. Another would be to play for time while
political support for the overall process shakes out. A
third might be encouraging the postal entities to focus their
energies on new product development in areas that do not
directly compete with U.S. firms.


24. (C) Our long-held position that the postal entities
should not be allowed to issue any new or altered product
prior to the establishment of equal competitive conditions

TOKYO 00000555 005 OF 005


has guided advocacy well, but it may be time to refine the
message. Without an interagency decision on what constitutes
equal competitive conditions (particularly with regard to
government ownership of the postal entities),we are less and
less able to chart a course through this difficult and
important topic that both properly balances U.S. interests
and manages the expectations of our Japanese counterparts and
other stakeholders.

ZUMWALT