Japan Post Bank: Current Issues and Prospects

328 Pages·2020·7.124 MB·English

by  Akira Uno

Akira Uno
Japan Post
Bank
Current Issues and Prospects
Japan Post Bank
Akira Uno
Japan Post Bank
Current Issues and Prospects
AkiraUno
KyotoUniversity
Kyoto,Japan
ISBN978-981-15-1407-4 ISBN978-981-15-1408-1 (eBook)
https://doi.org/10.1007/978-981-15-1408-1
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Preface
Between 2001 and 2006 the government abolished mandatory deposits of postal
savings and pension reserves with the Ministry of Finance, implemented the FILP
reform,andprivatizedpolicy-basedfinancialinstitutionsandpostalserviceswiththe
aim of changing Japan’s financial system so it would serve its original purpose of
complementing the private financial sector. These changes resulted inmultifaceted
structuralreformsoftheJapanesefinancialsystem,suchastherevisionoftheBasic
LawonSpecialPublicInstitutionsReformandprivatizationofpublicorganizations
bytransformingthemintostockcompanies.
Soonafterthesereforms,however,Japanwashitbyaseriesofshocks,suchasthe
collapse of Lehman Brothers, a change in ruling parties, and the Great East Japan
Earthquake. Each time one of these unexpected events occurred, the government
veered off track as it made revisions to laws that did away with the deadline for
makingitsfinancialsystemcomplementtheprivatesector.Inthemeantime,theratio
of government debt to GDP continued to climb. Although government debt is
financedbyhouseholdfinancialassets,nationalfinanceswilleventuallycollapse.
Thirteenyearsago,recognizingJapan’sfiscalproblems,Ibecameinvolvedinthe
privatizationofpostalservicesandstartedstudyinghowhouseholdfinancialassets,
which are the source of funds for both public and private financial services, were
used. I discovered that different types of financial institutions had different asset
portfoliosand that the difference inportfoliosbetweenpublic andprivatefinancial
institutions resulted in a profitability gap. I believed that these analytical findings
wouldprovideatheoreticalrationaleforprivatizingpublicfinancialservices,which
is now stalled, and promote the reorganization of regional banks, which have hit a
saturationpoint.Theanalyticalfindingsnotablysuggestthattheimbalancebetween
Japan Post Bank’s interest-bearing liabilities and earning assets causes low profit-
ability and that the interest rate risk that the bank is likely to be exposed to may
threaten its very existence. The analysis also found that regional banks must have
enough assets to maintain a certain level of profitability and that regional
restructuring, which includes mergers and consolidations, is a must in any future
discussionofregionalfinancialinstitutions.
v
vi Preface
Looking at the national wealth data in the government’s Annual Report on
National Accounts (Stock Accounts) and financial assets and liabilities by sector
inthechartprovidedintheBankofJapan’sFlowofFundsAccountsStatistics,one
sees that household financial assets are being used to repay government debt. For
example, according to the financial assets and liabilities chart for the end of 2018
providedintheBankofJapan’sFlowofFundsAccountsStatistics,householdassets
totaling1,779trillionyen,whichincludedepositstotaling961trillionyen,securities
totaling296trillionyen,insuranceandpensionreservestotaling522trillionyen,are
usedtofinancethegovernment’ssecurities(e.g., Japanese governmentbonds) and
borrowings, which amount to 1,083 trillion yen and 159 trillion yen, respectively,
through financial intermediaries such as banks and insurance companies, for
example.
Thissituationisaddressed inaMinistryofFinance document outliningJapan’s
fiscal status (published in October 2018) in the section highlighting the need for
restoring Japan’s fiscal health and related actions. The Ministry uses a graph of
general government debt and household financial assets data that highlights the
narrowing gap between government debt and net household financial assets (e.g.,
total financial assets excluding home mortgage loans) to illustrate that funds are
runningshortandasksforpublicunderstanding.
ThepercentageofJGBsheldbyforeigninvestorsislowat11%,andthemajority
of them are denominated in the domestic currency and underwritten by financial
intermediaries that use individual financial assets and insurance premiums as a
source of funds. While these domestic-currency-denominated JGBs become assets
of financial institutions, a 0% risk weight is applied when financial institutions
calculate their capital adequacy ratio based on the international standard. Japanese
financialinstitutions’long-terminvestmentsinlow-riskbutlow-returnJGBs,which
arenotrisk-weightedassets,predateJapan’snegativeinterestratepolicy.JapanPost
Bank and regional banks in particular hold a high percentage of JGBs, posing a
problemintheirportfoliomakeup.
Facing the high ratings of domestic-currency-denominated bonds, the Cabinet
Office’s economic and fiscal projections for medium- to long-term analysis of
January30,2019,makenoprojectionregardingturningaroundtheprimarybalance,
despitethefactthattheratioofgovernmentdebttoGDPhasreached230%.While
boththegovernmentandthepublicareawareofJapan’sfinancialcrisis,noonehas
foundawayoutofit.It’slikethefableoftheboilingfroghascometolife.
InthisbookIwillanalyzetotalassets(i.e.,theoperatingfoundation)andROA)
(i.e., profitability) of different types of financial institutions (public and private
financialservices)inJapantogetthebigpicture.Then,usingROAasanassessment
indicator, I will look into ways for these institutions to optimize their portfolios to
makethemostofindividualfinancialassets(especiallydepositsandsavings)froma
welfare economics pointofview andformulateatheoryofoptimization. Financial
institutions can optimize their ROA by using individual deposits and savings for
total optimization to maximize their return on investment (in other words, ROA:
Ordinary profit/Total assets (deposits and savings) ¼ Ordinary profit/Total assets
(depositsandsavings)(cid:2)Ordinaryprofit/Interestincome).
Preface vii
To verify whether total optimization is achieved, I will estimate optimal figures
for each bank based on their past data and change the composition of financial
institutions by type. If the share of total assets by type of financial institution is
optimized through mergers or verticalintegration between different types of finan-
cialinstitutions,andifROAisoptimizedoverallasaresult,thestructureoffinancial
institutions in Japan should be optimized. I will lay out institutional designs for
financialinstitutionsinJapanbasedonthispositiveanalysisandtheory.
Regional bank savings, postal savings, and agricultural cooperative savings,
which are individual deposits and savings that are automatically used as collateral
for government debt, are deposited with the Bank of Japan or invested in JGBs. If
this practice is creating a low-profit economy, the best fix would be to optimize
publicandprivatefinancialinstitutions,whicharefinancialintermediaries,through
restructuringsothathouseholddepositsandsavingscanbeusedtogeneratehigher
profitsinthepubliceconomicinterest.
Asoflate2018,theBankofJapanholds43%ofJGBs,totaling478trillionyen.
This yen figure is 86% of GDP, which is much higher than that of other advanced
countries.AlthoughtheBankofJapanhaspurchasedJGBsthathavebeenissuedas
amonetaryeasingmeasure,theproceedsfromsellingthegovernmentbondsowned
bybanksdonotflowintotherealeconomy.Themoneyinsteadgetsreinvestedtothe
tuneof350trillionyenindepositswiththeBankofJapan.Comparisonoftheflow
of postal savings totaling 51 trillion yen deposited by the Japan Post Bank at the
BankofJapan(whosesavingsareinvestedinJGBs)withmandatorydepositsreveals
that this flow of money is very similar to the flow of funds deposited with the
MinistryofFinance,whichwereinvestedinJGBs.That’swhythethreeprivatized
banks should be restructured so that the 51 trillion yen currently deposited at the
Bank of Japan can be used for lending; otherwise, they won’t be able to generate
fundsinthepubliceconomicinterest.Thethreeprivatizedbanks’expansionintothe
lending market is the key to the Bank of Japan’s exit strategy. Another good step
would be to fully privatize them as soon as possible (by selling all shares through
publicofferingsasrequiredbylaw).
If the economy grows, the government’s tax revenue will increase, leading to
healthyfiscalmanagementandturningaroundthegeneralaccount,andthenational
debt will be repaid. If the nation is to survive, the government should use tax
revenues to pay down the national debt, which Hitotsubashi University Graduate
School of Economics Professor Makoto Saito claims is the top priority for Japan,
while household deposits and savings are automatically used as collateral for
governmentdebt,bolsteringJapan’screditworthiness.
Thisbookwillfocusonchartingaroadmaptoearlyfullprivatizationofthethree
privatizedbanksandreorganizationofregionalbanks.
Over the various stages of my life encompassing the private, public, and aca-
demic sectors, I have implemented concrete knowledge-based measures to solve
problems in the private sector, gained practical public-sector experience in formu-
lating rules and systems designed to create social change, and learned how to
formulate theory throughunderstanding history andanalyzing thecurrentsituation
intheacademicsector.
viii Preface
The knowledge I gained through this experience has helped me construct a
practicalandwell-substantiatedmethodology.
Stuckinarutsincethecollapseoftheeconomicbubble,theJapaneseeconomy
urgently needs a boost. As the huge amount of individual deposits and savings
continuestobepooledinJapanPostBankwithatacitunderstanding,thatthebankis
guaranteed by Japanese government—because government is the principal stock-
holderofJapanPostHoldingsanditowns89%ofJPBank’sstock—fullprivatiza-
tion of public financial institutions continues to experience delays, and the
reorganization of regional banks remains untouched. I strongly believe that boldly
addressingtheseissueswillenableJapan’seconomytogetbackonitsfeet.
Kyoto,Japan AkiraUno
April2019
Acknowledgements
ThisresearchwassupportedbyDMGMoriCo.Iwouldliketoexpressmysincere
gratitudetothecompany’spresident,Mr.MasahikoMori,forhelpingtoprovidethe
financial assistance that made the work possible. I would also like to thank
Mr.HiroakiTamai,executivevicepresidentofDMGMori,andMs.MasamiHatano
fortakingtimeoutoftheirbusyschedulestolendahelpinghandwiththelong-term
translationprojectforthispublication.
Finally,IwouldliketothankMr.YutakaHirachi,senioreditorofSpringerJapan
KK,forhiswarmencouragement,whichhelpedmeovercomethemanyobstaclesto
publishing this book. My special thanks goes to my wife, Fukuko, who patiently
supportedmeoverthelast4yearsasIfinishedthisresearchwork.
ix
’
Introduction Optimizing Japan s Financial
Institutions
This book employs two analysis methods to approach its main theme, i.e., how
Japan’sfinancialinstitutionsshouldbeoperated.
First,IanalyzethetotalassetsofprivateandpublicfinancialinstitutionsinJapan
todeterminetheoptimalratioofassets heldbyeachtypeoffinancialinstitutionto
their combined total assets in order to create a free, fair, and efficient financial
market. I would like to start off by defining the term “public financial services” as
it’susedinthisbook.Publicfinancialservicesaregenerallydescribedaspartofthe
FiscalInvestmentandLoanProgram(FILP),whichisdesignedtoprovideloansto
local governments and private companies, for example, using funds deposited by
individualsinaninstitutionbackedbythefullfaithandcreditofthegovernment.In
this book, public financial services is used in a narrower sense and refers to nine
financialinstitutions,i.e.,theeightpolicy-basedfinancialinstitutions1relatedtothe
policy-basedfinancereformlaws(enacted inMay2007),whichwerebasedonthe
Act on Promotion of Administrative Reform for the Realization of Small and
Efficient Government (the Administrative Reform Promotion Act) that went into
effect in May 2006, plus Japan Post Bank. Following the reform of policy-based
finance(October2010),theeightfinancialinstitutionsweremergedandrestructured
into five organizations, i.e., Shoko Chukin Bank, the DevelopmentBank of Japan,
the Japan Finance Corporation, the Japan Bank for International Cooperation, and
the Japan International Cooperation Agency (JICA). The six restructured public
financialinstitutionscanbefurtherbrokendownintothreeprivatizedbanks(Japan
Post Bank, Shoko Chukin Bank, and the Development Bank of Japan) and three
state-ownedbanks(theJapanFinanceCorporation,theJapanBankforInternational
1TheeightfinancialinstitutionsaretheNationalLifeFinanceCorporation,theAgricultureForestry
andFisheriesFinanceCorporation,theJapanFinanceCorporationforSmallandMediumEnter-
prise,theOkinawaDevelopmentFinanceCorporation,theJapanFinanceCorporationforMunic-
ipal Enterprises, Shoko Chukin Bank, the Development Bankof Japan, and the Japan Bank for
InternationalCooperation.
xi