The Japanese government has scaled back its privatisation plan for Japan Post to hold more than a third of its shares, keeping a grip on the mammoth state-owned financial conglomerate that is the single largest holder of government bonds.
Japan Post is the country’s biggest financial institution, with financial assets of about ¥300trn ($3.3trn) – more than the GDP of France.
It holds about a third of the near ¥700trn Japanese government bond (JGB) market, thus making it potentially pivotal in supporting Japan’s deteriorating public finances.
The six-month old Democratic Party-led government said it plans to roughly double the limit on the company’s deposits and insurance by June, although it may review that around April 2012 depending on the impact the changes have on the banking sector.
Bond dealers said the news supported government bond prices on the view that the increased deposit limit would draw funds from other banks to Japan Post that would then be invested in JGBs.
“The new plan is supportive to longer-dated Japanese government bonds as the duration of bond holdings in Japan Post Bank’s portfolio is said to be longer than other banks. Japan Post Insurance is a life insurer so it is expected to invest more in longer-dated bonds,” said Chotaro Morita, head of Japan fixed-income strategy research at Barclays Capital.
The five-year to 20-year spread tightened 1.5 basis points to 163 basis points, shrinking from a decade high above 167 basis points earlier in March.
However, Vice Banking Minister Kohei Otsuka said he does not expect Japan Post’s assets to grow sharply given that average financial savings of Japanese households is about ¥11.2m, only just above the current ¥10trn deposit limit.
Although Japanese interest rates have been kept near zero for much of the past decade, Japanese savers have been reluctant to take risks in shares and foreign assets, prefering to put most of their savings on deposit in Japan.
Only one percent of total household assets in Japan are held in foreign currency or foreign securities accounts.
Awash with funds, banks in turn have been buying government bonds, helping to keep government bond yields low despite Japan’s dire fiscal condition.
Banking Minister Shizuka Kamei said that the plan is not intend to create a megabank to regularly buy Japanese government bonds.
But most analysts think it is unrealistic for Japan Post to reduce its bond holdings as it could destabilise markets.
Otsuka said it would be up to the management of Japan Post to consider its investment stance but added it would be difficult for Japan Post to reduce the weighting on government bonds in the near term.
Back-pedalling?
Prime Minister Yukio Hatoyama had frozen the previous privatisation plan, seen as the symbol of former prime minister Junichiro Koizumi’s market-friendly reforms, on the grounds that it ignored the needs of consumers.
The previous plan envisioned spinning off the two financial subsidiaries, Japan Post Bank and Japan Post Insurance, and selling two-thirds of the holding company by 2017.
Otsuka said the government will likely reduce its holding of Japan Post’s shares in the future but has not decided whether it would set a deadline to do so.
Japan Post’s financial services are considered the golden goose because the traditional demand for mail services is under pressure from increased use of electronic mail and Japan’s shrinking population.
The government also said it planned to keep over one-third of the shares in the parent company of Japan Post.
It plans to merge deliveries and post office services into the parent company, hoping that profits from the two financial firms will subsidise deliveries and post office services.
As a state-backed bank, Japan Post Bank has long had a deposit limit of ¥10m per person. But the government said it aimed to lift that to ¥20m to support its profitability.
Private banks have said that would give Japan Post an unfair competitive advantage given that Japan Post Bank is larger than any other banks in the country and still enjoys an implicit government guarantee.
