Japan's postal system does much more than deliver the mail. Its savings program collects vast sums that help finance government programs. For this reason proposed changes to the postal privatization plan adopted in 2005 are problematical not only for the finance industry but also for fiscal democracy and accountability. In this article, the first of a three-part series, the author explains how the postal system gave birth to "the second budget."

*     *     *

On April 30 this year, the cabinet of Prime Minister Yukio Hatoyama voted to submit to the Diet postal reform legislation intended as a "course correction" for the postal privatization plan adopted in 2005. The bill hit several snags during the drafting process, as divisions surfaced even within the cabinet over such proposed changes as raising the per-customer deposit ceiling for postal savings and providing special corporate tax exemptions for the postal system's financial services. Because the basic idea behind the reform bill is for the government to play a bigger role than that envisioned in the original privatization plan, most of the criticism thus far has centered on concerns that the rest of the finance industry will be put at an unfair disadvantage.

Although the fundamental ideological issue may be private versus national control of the finance industry, the proposed "correction" also raises important questions pertaining to the management of the postal-savings and postal-life-insurance funds. The problem relates not just to risk but also to reform of the Fiscal Investment and Loan Program—often called "the second budget"—and the principle of democratic control of government finances. To better understand the current situation and how it developed, we need to go back about 125 years.

The Postal System and Public Finance

In 1875, the Meiji statesman Hisoka Maejima, known as the father of the Japanese postal system, introduced a postal savings program to stand alongside the new system's mail delivery and money remittance services. Maejima hoped the system would expand rapidly and promote thrift among the general populace, but postal savings accounts were slow to catch on. In time, however, deposits grew—thanks in part to the incorporation of "savings education" in the grade school curriculum—and in 1885, they were placed in the account of the Deposit Bureau, newly established within the Ministry of Finance. At the beginning, the Deposit Bureau invested the bulk of those funds in government bonds under the ministry's Deposit Rules. Beginning in 1907, however, the Deposit Bureau's investment of postal savings funds began to include direct loans to the national treasury's general account and special account and the purchase of special bank bonds (used by prewar government financial institutions, such as the Industrial Bank of Japan and the Bank of Chosen, to raise capital). This was the origin of the Fiscal Investment and Loan Program legislated after World War II.

During the Taisho era (1912–26), the Deposit Bureau stepped up its purchase of special bank bonds and its loans to special banks to help fund domestic programs and foreign investment. Thus postal savings, channeled through such institutions as the Industrial Bank of Japan and the Bank of Chosen, were used to finance such projects as the Seoul-Busan Railway on the Korean Peninsula, and the Kirin-Changchun Railway and Taiji Mine in northeastern China. Since there was nothing in the Deposit Rules circumscribing the Deposit Bureau's investments, the bureau operated at the discretion of the government, and as a consequence problems emerged almost from the start. A typical example was the trouble surrounding the so-called Nishihara loans, ostensibly private loans extended to a Chinese warlord during 1917 and 1918 with the help of Deposit Bureau funds. The borrower defaulted, and the Japanese government was obliged to assume the debt, paying both interest and principle. In short, the postal savings fund was being used for private overseas investments, and the state was covering the losses.

Accountability for the Special Accounts

Such problems led to calls for tighter controls. In 1925 the government enacted legislation establishing the rules governing the management of the postal savings fund. ¹ That was when the special account budgets began to be submitted to the Diet every year.

The third basic service of the postal system, life insurance, was introduced in 1917 with the establishment of the postal life insurance program, known as Kampo. The Kampo fund was managed independently until 1943, when it, too—with the exception of money loaned to prefectural governments—was placed under the management of the MOF Deposit Bureau.

After World War II, new legislation passed in 1951 ² put the MOF Trust Fund Bureau in charge of fund management and laid the groundwork for integrated management of government funds under the Fiscal Investment and Loan Program, or FILP. Beginning in 1953, MOF was required to submit to the Diet an annual Fiscal Investment and Loan Plan covering all government-operated funds—including the Kampo fund, which at that time was again being managed independently—as information to support budget deliberations. Over time, FILP grew so large as to earn the appellation "the second budget." Through this system, public funds collected via the postal savings and Kampo programs (as well as the public pension system) were pooled into FILP and used to finance quasi-governmental bodies, the special account, local governments, and so forth.

When FILP first came into being, the Diet had no role in deciding how the funds were invested, that is, which entities received loans. However, legislation enacted in 1973 ³ made the Fiscal Investment and Loan Plan subject to Diet approval every year. More accurately, it mandated that all loans or investments with terms of five years or more be included in the special account budgets. The rationale was that, even though FILP used financial instruments in raising and spending funds, much like a private bank, it was still allocating resources as a tool of government policy. For that reason, it should be treated in the same way as the general budget, which is financed by taxes, and subject to Diet approval via the budget process. Underlying this decision was the principle of democratic (parliamentary) control of government finances, one of the key concepts enshrined in the Constitution of Japan.

¹ Yokinbu yokin ho (Postal Savings Deposits Law) and Okurasho Yokinbu tokubetsu kaikei ho (MOF Deposit Bureau Special Account Law).

² Shikin Un'yobu shikin ho (Trust Fund Bureau Fund Law) and Shikin Un'yobu tokubetsu kaikei ho (Trust Fund Bureau Special Account Law).

³ Shikin Un'yobu shikin oyobi Kan'i Seimei Hoken no tsumitatekin no choki un'yo ni taisuru tokubetsu sochi ni kansuru ho (Special Measures Law for Long-term Appropriation of the Trust Fund Bureau Fund and Postal Life Insurance Reserves, or Long-term Appropriation Law).