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Japan's $3+ trillion postal privatization to have significant impact on financial markets
1/5/2005

NEW YORK -- The Japan External Trade Organization New York (JETRO NY) released a newsletter today highlighting the privatization of Japanese postal services. It can be viewed at:

http://www.jetro.go.jp/usa/newyork/focusnewsletter/focus37.htm.

A summary is presented below:

* Japanese Have Preferred Security of Bank Deposits to the Risk of Equity Investment

The typical Japanese retail investor remains conservative in their outlook. Many confuse investment and speculation and equate the stock market with a casino. As a result, they have preferred the security of guaranteed bank deposits and especially that of the Postal Savings System (PSS), even though this has resulted in annual interest rate returns of less than 1%.

Deposit-Guarantee Limits Mark a Major Additional Reform Measure

Government guarantees on banking deposits have allowed the Japanese public to ignore the underlying stability of Japanese financial institutions. Realizing that this resulted in irresponsible behavior, in April 2002, the Japanese government began imposing limits and next year all interest-bearing demand deposits in private banks will become subject to guarantee limits on deposits over 10 million.

This is likely to have important consequences. Banks will have to demonstrate their health and Japanese investors will no longer be able to assume their deposits are 100% guaranteed.

Combined with a general need to seek higher returns as more Japanese citizens advance into retirement age, as well as creative marketing by stronger institutions, this is likely to increase general awareness, and the perceived attractiveness of different financial instruments and products.

* Privatizing Japan's Postal Savings System is the Next Reform Challenge

Perhaps the most ambitious goal of Prime Minister Koizumi's government has been the privatization of Japanese postal services. This includes Japan's PSS, with deposits totaling approximately $3.3 trillion, which makes it the largest financial institution in the world.

Japan's PSS privatization efforts stem from a growing recognition that the current system represents a major barrier to developing a more efficient financial system. Change is essential to allow the private sector to stand on its own feet and to develop a banking and business culture that can efficiently allocate capital according to market mechanisms.

Basic Principles to Commence Postal Privatization Adopted in September

In September, the Japanese cabinet adopted the basic principles needed to privatize Japanese postal services over a ten-year time frame. Under this plan, Japan Post's four areas of service - mail delivery, management of post offices, savings deposits and life insurance - will become separate businesses in April 2007. Progressive privatization will then occur over the following decade.

Privatization of Japan's PSS can be expected to lead to the development of more sophisticated and efficient financial and capital markets in Japan. This is true because funds that were previously directed into the public sector will then be channeled into the private sector where they can be used to revitalize existing firms and to support the needs of emerging companies.

* The Impact of Postal Savings Privatization is Potentially Enormous

If the Japanese public abandons the caution fostered by unlimited government guarantees and preferential tax treatment for PSS deposits, and begins to invest their savings in private banks and other investment vehicles -- the country's economy will never be the same. Huge amounts of pent-up capital would then be moved into private financial markets. This would help to bolster not only Japan's incipient economic recovery but, over time, financial markets around the world.

PSS privatization will also push Japan to more efficiently allocate capital and account for risk. The government will be forced to become more fiscally prudent. Since the postal service would no longer be required to purchase government securities, Japanese Government Bonds (JGB) would have to be sold to private investors. They are less likely to be forgiving about chronic budget deficits and will need to perceive a risk-reward ratio that effectively balances the ability of JGB's to provide stability, liquidity, diversification and Yen exposure with the interest rate that is provided.

* The Resulting Funds Flows Have the Potential to Raise Global Equity Investments

There are many reasons for optimism over Japan's future, and the potential for a $3 trillion+ inflow into Japanese and other securities over a decade of postal savings privatization cannot help but exert an additional positive influence. At the same time, greater private foreign and domestic participation in the JGB market will require a gradual transition away from the "zero interest rate policy" that has existed in Japan since 1999.

For this reason Japan's Ministry of Finance is presently planning road shows for foreign investors in New York and London next month. These events will familiarize investors with the government's plans to privatize the PSS, the investment potential of JGB's, as well as other recent trends and developments that have made Japan one of the best performing and most attractive investment opportunities in the world over the past year.

Data, statistics and the reference materials presented within this newsletter have been compiled by JETRO from publicly-released media and research accounts. Although these statements are believed to be reliable, JETRO does not guarantee their accuracy, and any such information should be checked independently by the reader before they are used to make any business or investment decision.

For additional information on economic and financial trends in Japan, please contact Akihiro Tada, Executive Director of JETRO NY at Tel: 212-997-0416, Fax: 212-997-0464, E-mail: Akihiro_Tada@jetro.go.jp

Focus is published and disseminated by JETRO New York in coordination with KWR International, Inc. JETRO New York is registered as an agent of the Japan External Trade Organization, Tokyo, Japan and KWR International, Inc. is registered on behalf of JETRO New York. This material is filed with the Department of Justice where the required registration statement is available for public viewing.

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