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Home > East Asia > 

Japanís Koizumi Follows Through
Heide B. Malhotra
8/30/2005



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Japanese Prime Minister Junichiro Koizumi called a snap election on August 8 after the countryís upper house of Parliament voted down his controversial bill that would have put Japanís state-run Postal Savings System (PSS) into private hands.

Koizumi was following through on a promise to call an election should the upper house defeat the privatization bill, which was central to Koizumiís reform plans. The bill had narrowly passed the lower house of Parliament in a 233-228 vote, amid much disagreement within Koizumiís ruling Liberal Democratic Party (LDP).

The bill calls for dismantling the state-run postal service to create four independent companies, including banking services and insurance services.

Stakes are high. PSS is currently the worldís largest bank. It holds more than 119 trillion yen (US$1 trillion) in insurance deposits and around 211 trillion yen (close to US$2 trillion) in savings deposits.

PSS also holds an unfair advantage over private banks. It is exempt from paying corporate taxes and from paying risk premiums to Japanís deposit insurance fund.

To Koizumi, the billís defeat amounts to a no-confidence vote. By forcing an election over the issue, Koizumi is in effect testing the publicís confidence in his plan, his leadership, and his party.

Koizumiís gamble might backfire. The general vote could realign powers and oust the LDP, handing the reins to the Democratic Party of Japan.

Most of the 400,000 postal system employees are opposed to the bill. Around 3,000 postal workers held a protest march in downtown Tokyo on August 1.

At present, all Japanese banks are granted unlimited government guarantees on most deposits. Private banks will lose this privilege starting in 2006. This is another advantage for PSS.

PSS was established in 1875. Before the 1970s, it became the countryís strongest player, as the banking and insurance sectors were weak and fragmented. Deposited funds were invested in infrastructure projects, such as building highways, railroads, electric power systems, hospitals, and schools.

After the mid-1970s, Japanís private banking sector matured. Competition lessened the monopoly power of the state-run PSS, and infrastructure projects were able to borrow funds from the private sector. Funds from PSS were used in projects that did not bring real value to the depositors, such as the tunnel bridge across Tokyo Bay; many of these projects will not be able to repay the loans, as there is no substantial income to be expected.

Beginning in 2001, PSS was finally allowed to control investment of its own funds without political interference. PSS has become obsolete as a funding institution for Japanís infrastructure projects, although it remains strong as a trusted bank for the Japanese.

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