A Private Post and a Practical Partnership

Just slightly over a year after Japan’s earthquake and tsunami, Japanese officials seem to be taking some important strides in favor of incrementally freer markets in a couple areas.

First, it seems three parties—the Democratic Party of Japan (DPJ), the Liberal Democratic Party (LD)) and the New Komeito—reached a broad agreement to revise and move forward with the (long languishing) privatization of Japan Post. The Japan Post is a conglomerate of postal services, banking and insurance subsidiaries. The bank is the largest in the world by deposits ($2.1 trillion) and accounts for 22.3% of Japanese deposits. The government’s holding is estimated to be worth $102 billion.

The current privatization law was passed in 2005 but was suspended by the DPJ when it defeated the LDP in 2009. The new amendment includes some changes to the privatization law, including restructuring the Japan Post into four companies, down from five. Also, following privatization, the government will continue holding one third of the Post for a time, but the bank and insurance companies will be sold. The original legislation included a deadline of 2017 by which all government shares needed to be sold—the amendment strikes that language, now targeting instead the government sell its ownership shares as soon as possible. Proceeds from the sale, if it happens, are expected to go toward the $158 billion reconstruction and stimulus spending expected to be necessary over the next five years or so.

The bill is expected to receive a vote in the Diet this year—if it does, it seems likely the plan would move forward given widespread cross-party support. If Japan successfully privatizes the majority of Japan Post, it would be major win for the freer functioning of Japanese financial markets. The existence of such a significant market player that’s government-owned makes free competition quite difficult. Consider: Such a sizeable institution commands considerable economies of scale, allowing it to provide services to clients that smaller banks and institutions may not be able to support—among other advantages.

Further, as we’ve discussed before, the likelihood the government’s the best business operator or picker of winners and losers is pretty low—a near-universal truth about governments not just in the US, but globally as well. So in that sense, returning operation of such a behemoth to the private sector likely not only benefits the business itself, but also its customers and competitors overall. Some near-term dislocations are highly likely—but in our view, Japan is likely to benefit vastly more long-term from finally privatizing its massive bank.

Japan also opened free trade discussions with Canada this week, with an aim toward establishing a bilateral free-trade pact and boosting private-sector cooperation, including in the energy industry. Japan would ideally seek the elimination of a 6.1% tariff on car exports to Canada, while Canada has expressed interest in increasing its exports of agricultural products, including soy beans and pork, to Japan. Cooperation in energy would be particularly important to Japan at the moment in the wake of last year’s natural disasters. Overall, Japan’s a relatively resource-poor nation, and energy is clearly of utmost importance not only for rebuilding devastated areas, but also for increasing economic growth moving forward.

What’s also interesting regarding the talks is the fact Japan—a large, developed economy—currently has no free-trade agreements with any G8 nations. A Canada deal would be the first, but perhaps not the last, considering Japan’s discussion of involvement in the Trans-Pacific Partnership.

Taken together, the stories paint an optimistic picture of a country making important strides toward continued recovery and economic growth.