Time to End Postal Savings

For the past decade, Mr. Koizumi has advocated privatizing the postal system, including the huge Postal Savings system. Now that he is Prime Minister, he continues to advocate this change. I am pleased to see that Prime Minister Koizumi is skeptical of the value of the government-run Postal Savings system. However, his proposals go both too far and not far enough. Basic postal services have not been privatized in many countries. There are very good reasons to leave this important operation in government hands. But for Postal Savings, his solution is not radical enough; the Postal Savings system should be completely eliminated rather than just privatized.

Many nations, including the United States and Japan, have permitted private competition in parts of the postal system, especially express delivery services. That has been a good choice—with a complete monopoly over all forms of mail delivery, government postal systems become very lazy and inefficient. However, the basic mail system—daily delivery of mail to every home and business in the nation—is a natural monopoly and a valuable public service. Just imagine competing sets of post offices and daily deliveries to every home! As a monopoly, it’s not clear that a private postal system would behave any differently than the government one. The same conclusion applies for the current talk of a halfway step of making the postal system a koosha.

This conclusion does not mean that Japan does not need reform—postal rates in Japan are absurdly high. Why should mailing a simple letter cost 80 yen in Japan (or 120 yen for one that does not match the Post Office’s overly strict size requirements) but only the equivalent of 41-yen in the United States? Why should Japanese businesses have to mail their magazines and catalogues from Hong Kong or Seoul because international rates are cheaper than domestic ones? Something should be done to lower postal rates, but privatization is not the solution. Perhaps Ms. Makiko Tanaka should have become Minister of Soomusho so she could terrorize postal bureaucrats about cost reductions.

The bigger issue is what to do about Postal Savings. Once upon a time, Postal Savings was useful. When the banking and insurance sectors were weak and fragmented, a nationwide government-run institution made sense, helping the public to accept the notion of saving in the form of bank deposits or through purchase of basic life insurance. These nationwide programs also provided a useful way to collect money that the government could lend for critically needed public infrastructure projects. When Japan was poor, and still catching up with the industrialized nations, postal savings funds helped finance investment in electric power, railroads, highways, hospitals and other revenue-generating projects. Overall, these funds were invested wisely, and all Japanese should be proud at the record of investment for most of the past half-century.

However, that era was over by the mid-1970s. By that time the private banking sector was very well developed. Now Postal Savings competes with the private sector for deposits. Furthermore, the relative role of Postal Savings has actually increased over time. In the late 1960s, during the height of high-speed economic development and the related need for government-sponsored public infrastructure investment, Postal Savings deposits represented 14-15 percent of total time deposits in the nation. That ratio has more than doubled to 33 percent in recent years. Postal Life Insurance also represents more than a third of all life insurance policies. Despite this amazing expansion, the Postal authorities continue to exhort people to keep their money in Postal Savings accounts. “Manki no Tsugi mo, ‘Yuucho’ ni Kimetemashita” reads the current advertising campaign. That’s ridiculous. And what an irony! As the rest of the world has turned more toward market capitalism, and as the Japanese government as talked about deregulation, the reality is that the nation has moved in a more socialist direction.

Actually, some change has already occurred. Beginning in the late 1980s, the Postal Savings system has been permitted to retain approximately 12 percent of the funds raised through sale of insurance policies and 3 percent of Postal Savings funds. These funds are invested by a subsidiary organization, the Kan-i Hoken Fukushi Jigyoodan—an organization created back in 1962 to run inexpensive recreation facilities for holders of Postal life insurance policies. That is, the money is being invested by an organization with absolutely no training or experience in investment. As might be expected, the record of this organization in investing postal life insurance and postal savings funds has been so bad in recent years that it receives an operating subsidy from the government’s general account budget—a fact that most Japanese citizens probably do not know. In the mid-1990s, that subsidy was around 25 billion yen.

Now another change has occurred. Beginning this April, all funds in Postal Savings—both life insurance receipts and savings deposits—will be invested by the system rather than being turned over to the zaito. So the formal link has been ended, removing a principal rationale for the existence of Postal Savings.

On the lending side, there was also less need for government involvement after the mid 1970s—railroads, electric power companies, and some of the other favored borrowers were fully capable of borrowing in private-sector markets and should have relied entirely on these private sources. Why should these swollen Postal Savings funds continue flowing into the zaito to finance public infrastructure projects when the need for such financing has lessened? The result was predictable. With more money to invest than the government really needs, funds have invested in dubious projects. The tunnel-bridge across Tokyo Bay from Kawasaki to Chiba Prefecture, for example, is a project that will never collect enough in tolls to pay back its loans.

Some public policy projects, such as lending to national universities, airports, highways, or bridges may still require some form of public lending support. Such revenue-generating infrastructure organizations should issue bonds, as they do in the United States. This exposes them to both political and market tests. As a voter, you should be permitted to vote on whether you want the prefectural or city government to issue bonds for a new airport. After all, should the project fail, your taxes will have to pay off the bond holders. If approved, then markets will evaluate the risk and determine an appropriate interest rate. Even this is not a perfect system, but it has worked reasonably well in the United States—and sometimes voters do turn down bond issues.

In theory, this change in the zaito has already happened. Starting in April of this year, all organizations which borrow from the zaito are supposed to either issue their own bonds or borrow from a special fund created by “zaito bonds” issued by the Ministry of Finance. This change was hailed as a major administrative reform, but the reality is that very few of these government-related organizations are issuing their own bonds. Most are still borrowing from the Ministry of Finance’s fund, so little change has occurred. Quite frankly, the Japanese public has been misled about the extent of reform.

But at least the Postal Savings system now has control over investment of its own funds (even though much of money may actually be used to purchase “zaito bonds”). Deprived of its major purpose for existence, what should be done with the Postal Savings system? Prime Minister Koizumi’s proposal to privatize the system is one possibility for change. This proposal would create one or more large new commercial banks. But would this be a good idea? No—for the following three reasons.

First, the Japanese economy already relies too heavily on bank loans. Advanced, mature industrial nations have financial sectors that use a mixture of bank loans, bonds, and equities. Japan has been quite unusual in the past 50 years by relying very heavily on banks rather than bonds or equities. The “Big Bang” reforms of the past several years are supposed to alter this system, reducing the role of banks. This implies that the banking sector needs to shrink—a process that is already underway. Why should the government create a new set of private-sector banks in the midst of this contraction?

Second, Postal Savings has operated as only one-half of a bank. As described above, until this year most of the funds raised from life insurance purchases and savings deposits went to the zaito. And the record on the small portion of the funds that the Postal Savings system has invested on its own is dismal. Do you want a group of bureaucrats with no understanding of bank lending or market investments to suddenly gain responsibility for running large commercial banks? The pattern of thinking between private-sector businessmen and bureaucrats is quite different. Bureaucrats do not understand business or the interplay between risk and return. But understanding and evaluating risk and return is critical for operating a bank. The potential for failure is high if bureaucrats move into banking. The last thing Japan needs now is a new set of badly managed banks to worsen the bad debt problems of the nation.

Third, since Mr. Koizumi will apparently push privatization of only Postal Savings rather than the entire postal system, a serious problem of separation emerges. Postal Savings offices are physically located inside post offices. How are the two operations to be separated physically? How will the employees be separated into two groups—especially in small post offices where employees may have been doing both mail and Postal Savings jobs? More importantly, who will set the rent that these new private banks will pay to the government for the space they occupy in post offices? These are very tricky questions, and the potential for corruption is high. If the rent is low, and some employees work on both sides of the operation, the “private” banks will be subsidized by the public—to the benefit of their new owners.

These three factors imply that privatization of Postal Savings could be a major disaster. But if the Postal Savings system is outdated, then what else can be done? The answer is to simply end it. This avoids injecting new competition into the over-crowded commercial banking sector; it avoids the likely failure of former bureaucrats to understand what banking is all about; and it avoids the problem of separating the postal and savings sides of the postal system.

Eliminating Postal Savings need not happen suddenly. The logical approach is for the government to stop accepting any new deposits or roll-overs in Postal Savings accounts now. Since the maximum Postal Savings deposit is 10 years, this would lead to a gradual reduction in deposits over the next ten years until the balance reaches zero. If the bureaucrats running the system make poor investment choices with the money over those ten years, at least they will have a diminishing set of funds to mismanage.

Does the idea of not having the friendly, safe Post Office as a place to save money bother you? Actually it was not so safe—given the record of poor direct investments and the scandals concerning some of the projects that received funding through the zaito. In reality, your taxes will be needed to pay the interest on Postal Savings deposits because of the failures of some of the borrowers. Besides, the time has come for the Japanese public to be more sophisticated in the handling of their savings. If you want a safe investment, buy Japanese government bonds, or put your money into a mutual fund that invests in these bonds. Alternatively, put money in commercial banks; even with a limit, the deposit insurance guarantee is rather generous.

This proposal to destroy the Postal Savings may sound quite radical. But the existing system is outdated. Something needs to happen, but the privatization idea presented by Mr. Koizumi is a bad one. That idea may have been enough to earn Mr. Koizumi a reputation as a radical reformer, but the reality is that his idea is not radical enough. Like the dinosaurs, the time has come for Postal Savings to become extinct.