Because Japan's postal savings system plays a major role in financing government programs, proposed changes to the privatization plan adopted in 2005 raise important issues of fiscal control and accountability in a democratic nation. In the final installment in this three-part series, the author explains why the government's latest postal reform bill threatens to "turn back the clock 100 years."

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After the Democratic Party of Japan unseated the Liberal Democratic Party in August 2009, the new administration decided to correct perceived problems in the 2005 postal privatization plan. The specifics of this "course correction" are contained in the postal reform bill that the Cabinet submitted to the Diet at the end of April. A detailed examination of the legislation is beyond the scope of this paper. My focus here is on how the latest reform would impact investment of the postal savings and investment funds.

Risk and Accountability

The current reform plan would raise the upper limit on postal savings deposits per depositor, as well as the upper limit on individual insurance policies, a change that has drawn considerable criticism. But one aspect of this policy that needs more attention is how the government intends for these much augmented funds to be invested.

On April 20, at an internal meeting organized by the Ministry of Internal Affairs and Communications with DPJ politicians, Internal Affairs and Communications Minister Kazuhiro Haraguchi submitted a written proposal calling for more effective use of postal savings deposits and life insurance reserves. The proposal stresses the need to change the current portfolio, which invests money mainly in JGBs, in order to "boost returns, while giving due consideration to security issues and keeping investment sound through risk management." More specifically, the document suggests the following:

1. Investment and financing targeted to growth areas
(1) Investment and financing via cooperation, etc., with overseas funds:
Investment of assets in creditworthy projects carried out under intergovernmental agreements, etc. (investments in and loans for infrastructure projects or venture businesses relating to high-speed rail, toll roads, water supply, etc.)
(2) Investment in and financing of projects implemented under public-private partnerships:
Development of social capital (bridges, hospitals, schools, and similar facilities) through PFIs [private finance initiatives] and PPPs [public-private partnerships]
(3) Investment and financing in future growth industries:
Medicine/nursing, environment, information and telecommunications

2. Foreign bonds

3. Loans to individuals
Home loans, personal loans

At the same time, the proposal insists that "investment decisions would be left to the independent judgment of Japan Post Bank and Japan Post Insurance."

On April 27, moreover, the daily Asahi Shimbun reported that Haraguchi, in anticipation of the new postal reform legislation, had ordered his agency to study the possibility of investing something on the order of 10 trillion yen in postal savings and postal insurance funds in growth areas in Japan and abroad. Haraguchi was quoted as saying that the investments would be aimed at strategically supporting Japanese firms working in infrastructure development and other overseas programs. "Japan Post Holdings, Japan Post Bank, and Japan Post Insurance will make their own decisions; we will just assist strategically," Haraguchi explained. "It will all be according to the business judgment of private management, so it isn't like a sovereign wealth fund," he maintained, adding that they were thinking in terms of "about ten trillion yen to start."
In an editorial, the Asahi expressed concern that "the funds' investment activities could be hidden from the public eye and could incur losses for which the taxpayers might end up bearing the cost." A number of critics have lashed out against the plan, warning that it could end up reviving the old, pre-reform FILP system and the wasteful spending associated with it. They are troubled by similarities between some of the investment categories in the aforementioned proposal and those financed with postal savings and Kampo funds prior to the 2000 FILP reforms.

Public or Private?

Article 13 of the postal reform bill before the Diet stipulates that "postal operations shall be carried out with a view to contributing to the healthy development of regional economies and to the economic vitality of the private sector, as by nurturing small and medium-sized businesses," and it identifies "services that contribute to local communities" as one of the responsibilities of the new Japan Post companies. In addition to the basic postal and financial services mandated by law, they would be free to make use of the nation's post-office network to develop new areas of business oriented to improving the lives of local residents, merely by notifying the government of their intentions. As long as they could explain how their new enterprise meshed with the objectives of the new postal reform law, they would be at liberty to branch out into all kinds of businesses.

The bill enumerates the companies' new operating principles, including security, soundness, and profitability, but it does not answer the big question of how those principles square with one another and which are to take priority. In asset management, there is generally a tradeoff between risk and returns. Haraguchi's stated intention to break away from reliance on JGBs suggests that the new policy will tolerate greater risk for the sake of higher returns. Yet the emphasis on services that "contribute to local communities" suggests a more public orientation, which generally demands lower risks and lower returns. Is the management policy Haraguchi envisions that of a for-profit business or that of a public service? If both, how does he intend to strike a workable balance given their conflicting priorities?

At this point, the structure and approach that will govern the new companies operations remain a question mark, but where investment of the postal savings and insurance funds is concerned, the government must make a fundamental choice: public or private? Is the plan for each company to make its own investment decisions from the perspective of a private financial institution, even though it has certain public responsibilities, such as universal service? Or are these decisions to be shaped by government policy? A case can be made for or against either option. This is a policy decision, but if the government goes with the latter option, then there is a need for rules and regulations to preserve democratic control of government finances.

The role of government is to fund programs and projects that are too unprofitable or risky for the private sector. Government programs are by nature unprofitable or risky. To be clear, I do not rule out the idea of allowing a higher level of risk in the investment of postal savings and postal insurance funds, but if policy considerations are driving these risky investments, then they must be subject to democratic control, and this is done through the Diet's deliberation and approval of the budget. This is our system for allocating resources in ways that the market cannot accomplish. The Japan Finance Corporation, established in October 2008 through the merger of the National Life Finance Corporation, the Agriculture, Forestry, and Fisheries Finance Corporation, and similar bodies, is a joint-stock company, but because it provides the financing that our political leaders deem necessary to carry out their policies, its outlays are subject to Diet approval just like those of its predecessors.

FILP was criticized for adding to the public burden by supporting wasteful projects and spendthrift public corporations, but at least it extended loans with the approval of the Diet, not at the sole discretion of the administration. When questions were raised about the management or finances of a public corporation, such bodies as the House of Representatives Committee on Audit and Oversight of Administration, the Board of Audit, and the Ministry of Internal Affairs and Communications were empowered to investigate. If the current postal reform eliminates the role of the Diet on the grounds that Japan Post Bank and Japan Post Insurance are joint-stock companies, yet allows the government to interfere in the allocation of their resources on policy grounds, it will be turning the clock back 100 years. Without suggesting that the situation today is analogous to that existing a century ago, we should nevertheless ask ourselves if we can afford to repeat the mistakes that gave rise to the Nishihara loans.

Learning from the Past

Under the current reform legislation, the Japan Post Group would remain wholly government funded for the time being. Future plans call for the government to retain more than a one-third stake in the parent company, Japan Post Holdings, and for Japan Post Holdings to control more than one-third of Japan Post Bank and Japan Post Insurance shares. While Haraguchi claims that investment of the postal savings and investment funds would be left to the business judgment of these joint-stock companies, there is no denying that the government (or its representative in the person of the minister of internal affairs and communications) will retain tremendous influence over their management. How can the companies be expected to make independent business decisions in defiance of the minister of internal affairs, knowing that the minister has the power to appoint and dismiss their directors?

Such an arrangement also raises the specter of preferential financing for specific agencies or organizations out of political considerations. Yet if a company lost money on such a loan or investment, the politician behind it all could evade responsibility on the grounds that any investment by a joint-stock company was strictly a business decision.

Let me repeat: The issue here is not whether postal services should be privatized or what form of management is most appropriate for these services. My point is that, if postal savings and insurance funds are to be employed for the purposes of public policy, we must maintain a mechanism for democratic control, whether by Diet approval or some other means. The FILP system came under criticism for loans that were never recovered even those its activities were subject to oversight by MOF officials, the Diet's budget and audit committees, and the Board of Audit. How can we expect a more judicious allocation of resources to emerge from the "business judgment" of a joint-stock company—or, more accurately, a quasi-governmental body with a public function—that is free from such oversight? Up to this point, democratic control over the government's investment and loan activities has been gradually strengthened through the Fiscal Investment and Loan System. Now, postal system reforms threaten to reverse this progress.

The government's postal reform bill stops short of delineating the new companies' business operations and activities on the grounds that much of this should be left to the discretion of management. Theoretically, such vague provisions would leave the companies free to do virtually anything they chose, providing it did not run counter to the goals and principles of the reform bill. Taking risks that most would consider excessive could be justified by the principle of profitability.

If the purpose of the latest postal reform is to correct the 2005 privatization plan by strengthening the government's hand and utilize the postal savings and insurance funds for policy purposes, then a mechanism for democratic control is necessary. At the very least, the government needs to propose specific rules and guidelines for fund investment and gain a public consensus for them. Those who would overhaul a major public institution have a responsibility to base those efforts not only on factual analyses of the present situation but also on a full understanding of the historical processes that brought us to this point—lest they condemn us to repeat the mistakes of the past.