GOJ PRESENTS ITS OUTLINE ON POSTAL REFORM

UNCLAS SECTION 01 OF 03 TOKYO 000282 SENSITIVE SIPDIS STATE FOR E, EEB AND EAP/J NSC FOR LOI, RUSSELL USTR FOR AUSTR CUTLER, BEEMAN, LEE, AND HOLLOWAY E.O. 12958: N/A TAGS: ECON EFIN PGOV JA SUBJECT: GOJ PRESENTS ITS OUTLINE ON POSTAL REFORM REF: A. 09 TOKYO 2921 ¶B. TOKYO 0170 SENSITIVE BUT UNCLASSIFIED. CONTAINS BUSINESS SENSITIVE INFORMATION. ¶1. (SBU) SUMMARY. Senior Vice Minister (SVM) Kouhei Ohtsuka of the Financial Services Agency (FSA) met with the DCM on February 8, to give an advance briefing of the release of the Government's outline on postal reform. The release of the outline begins a one-month dialogue among coalition partners. Keys issues for discussion include the percentage of government ownership of postal companies, whether caps on saving deposits and insurance policies should be raised, and the expansion of postal financial companies into new business areas. Ohtsuka emphasized the GOJ's desire to conduct an open and transparent process and to continue to exchange views with the USG and U.S. industry representatives. He also expressed interest in finding synergies and cooperation on products and distribution of products between the Japan Post Group companies and the private sector. Ohtsuka claimed postal reform was important to secure financial stability in Japan. In a meeting with the Ambassador, a U.S. industry representative said the outline was "not as bad as expected." END SUMMARY. -------------- OUTLINE BEGINS ONE-MONTH DISCUSSION -------------- ¶2. (SBU) On February 8, SVM Ohtsuka gave the DCM a preview of the outline on postal reform by the Postal Reform Policy Committee released later that day. Ohtsuka was alone, and his command of the details of the reform plan demonstrated his intimate involvement in its development. He said the release of the outline will begin a one-month discussion on issues related to postal reform. At the end of this period, Minister for Internal Affairs and Commmunication (MIC) Minister Haraguchi and FSA and Postal Reform Minister Kamei will consult with the Prime Minister's Office to make the final decision on the legislation. ¶3. (SBU) The current five company structure will be reorganized into three companies. JP Holdings, JP Service (mail delivery),and JP Network (post offices) will be merged into a new parent company and will be designated as a special corporation. This new company will have a mandate of providing universal service in a uniform manner throughout the country. A special law (tokubetsu hou),to be drafted in the current Diet session, will govern the new parent company. JP Bank and JP Insurance will remain as private financial institutions governed by the Banking Law and Insurance Business Law and supervised by the FSA. They will have the option to develop new businesses, including third sector insurance products. Ohtsuka said MIC would supervise the parent company. Also, he said the special law would create a regulatory carve-out for very small post offices and they would be administered by both MIC and the FSA. (NOTE: The definition of what constitutes a small post office is not yet defined. This, however, tracks with comments by Minister Kamei who said it was unfair for small post offices to be subject to the same regulations as megabanks. END NOTE.) ¶4. (SBU) The amount of stock held by the government in the new parent company and the parent company's ratio of ownership in the two financial institutions are still to be determined. Options mentioned in the outline are 100 percent, more than two-thirds, more than one-half, and more than one-third government ownership of the parent company, and anywhere from more than one-third to 100 percent ownership of JP Bank and JP Insurance by the parent company. Currently, JP Holdings owns 100 percent of the stock of both TOKYO 00000282 002 OF 003 financial companies. Also for discussion in the coming month is whether to lift the 10 million yen (approx. $112,000) cap on JP Bank deposits and 13 million yen (approx. $146,000) cap on JP Insurance policies. Ohtsuka indicated there is a connection between these two issues. He contends the greater the percentage of shares held by the government via the parent company, the lower the cap should be. Ohtsuka thinks the caps should be reviewed every three years. He believes this would provide a smooth transition from the current third phase of postal service to a future fourth phase of reform, when the GOJ would divest itself of all stock. Ohtsuka characterizes the first phase as the Meiji Period to World War II and the second phase as World War II until the 1990's. -------------- - REFORM NECESSARY, KEEP DIALOGUE GOING WITH USG -------------- - ¶5. (SBU) Ohtsuka indicated he would like to continue dialogue with the USG and U.S. industry, via the American Chamber of Commerce in Japan (ACCJ),during the consideration period. He emphasized that efforts should be made to realize a synergy effect through business tie-ups between JP group companies and private sector companies. The JP group companies should not harm the private sector, asserted Ohtsuka; they should look for "win-win" partnerships with private companies that already have the know-how. As a favorable example, Ohtsuka cited the distribution of some Aflac products at post offices. He believes there is room for expansion of this type of business going forward. ¶6. (SBU) In concluding his presentation, Ohtsuka emphasized that postal reform was necessary to protect Japan's financial system. There are concerns about the profitability and future potential of the Japan Post group companies. Ohtsuka said he understands that the management of these companies will impact the private sector. He mentioned Treasury Secretary Geithner's statement on the diversity of financial systems at the G7 Financial Ministers Summit the previous day, though Ohtsuka acknowledged that Secretary Geithner was not speaking specifically about Japan Post. Ohtsuka tied that to the unique status of the postal system in Japan and its 130-year history. He said the GOJ would proceed carefully with postal reform; rapid changes are impossible. Ohtsuka hopes the coming changes will be good for both Japan and the United States. He said he understands our level playing field concerns and that he appreciates the consideration and understanding of the USG as this process moves forward. Ohtsuka emphasized his opennesss to constructive and creative discussions, saying this should not become a political issue. 7 (SBU) Asked if new products would be included under the universal service obligation, Ohtsuka said they would not. He said the universal service requirement of the government should be kept to a minimum. While repeating that third sector products would not be part of the requirement, he mentioned Japan Post group companies were facing financial difficulties. He implied they should be freed up to become more self-sufficient and thus, perhaps, move in to more profitable areas. Ohtsuka tied all of this to his desire to have the GOJ hold as little shares as possible. -------------- INDUSTRY TAKES A WAIT AND SEE APPROACH -------------- ¶8. (SBU) A U.S. insurance industry representative told the Ambassador in a meeting on February 9, the outline "could have been much worse." He said he was encouraged there are a number of market-oriented reformers in the Democratic Party TOKYO 00000282 003 OF 003 of Japan (DPJ). He believes they are trying to do the right thing within the confines of the current political and economic situation in Japan. The businessman thanked the Ambassador for the active engagement with the GOJ by Embassy and other USG officials. He said he thought this was definitely making a difference in increasing the transparency and openness of the process. The representative said much is still vague and it will be necessary to see what the next month of consideration by the Diet brings. One area of concern he highlighted was the regulatory carve out for small post offices. Another is the mention of tax breaks for the postal companies. The industry representative said it is imperative to keep the dialogue going to avoid a trade dispute on postal issues between the United States and Japan. ROOS