Stamp Of Approval

The Sept. 11 snap election is a plebiscite on the privatization of Japan Post.

The fiat was wrapped in purple cloth, the colour of the Japanese imperial line, and reverently presented to the speaker of the House of Representatives on a lacquered tray. When Yohei Kono read out Emperor Akihito's ceremonial edict to dissolve Japan's lower house, lawmakers in the chamber reacted with shouts of “Banzai!” to gird themselves for the coming election battle. Bowing from his seat, silver-maned reformer Prime Minister Junichiro Koizumi pulled off an astounding achievement on Aug. 8. By calling a snap vote, not only had he stared down rebels in his ruling Liberal Democratic Party who had defeated his bills to privatize Japan's postal system, he also managed nothing short of a miracle in making staid, consensus-oriented Japanese politics interesting. At stake in the Sept. 11 poll, the most important in Japan in years, is the conservative LDP's long-held grip on power and Koizumi's bold agenda to make the moribund country more productive and competitive. The outcome could have profound implications for the world's second-largest economy, which recently managed to drag itself into a convincing recovery phase following years of stagnation and false starts.

Koizumi had suffered a stinging defeat on Aug. 8 when his bills to reform Japan Post–and release its more than US$3 trillion in assets into the private sector–were rejected in the House of Councillors, the Diet's upper chamber, by 125-108, with 30 LDP members either voting against or not casting ballots. Yet the maverick premier was all smiles that day. By refusing to endorse in the snap election LDP members who are against postal reform, he moved one step closer to fulfilling his repeated promises of destroying the party's politics-as-usual, characterized by factionalism, pork-barrel spending and corruption scandals. (A popular Koizumi slogan is “I will wreck the LDP if the LDP tries to wreck the Koizumi reforms.”) Privatizing Japan Post has been the centrepiece of his reform program since he came to power in 2001.

By turning the election into a quasi-plebiscite on postal reform, Koizumi is gambling that voters will back him and pressure the upper house to pass the bills when they are resubmitted to the Diet. (A poll published Aug. 23 by newspaper Nihon Keizai had the LDP with more than double the support of the main opposition Democratic Party of Japan, with postal reform as voters' No. 2 priority policy.) Koizumi's own legacy is at stake, as well: he vowed to step down if the LDP and its Buddhist-backed partner, the New Komeito Party, fail to win a majority in the lower house. A characteristically Zen-like comment to some political reporters in late July suggested the scope of his ambition: “I will change Japan when the bills are enacted, and I will change Japan even if they are rejected.”

Critics have pointed out that other issues facing the archipelago, such as the ailing pension system and the critically low birth rate (9.47 births per 1,000 population), are far more pressing than the fate of Japan Post. But understanding the gargantuan government corporation is key to an appreciation of why punctilious letter carriers are at the centre of this explosive political debate. With post offices in nearly every village in Japan, 19,000 of which are tokutei (small outlets, run by hereditary postmasters, that are a relic of a bygone age), mailmen have long served as an effective vote-gathering machine for the LDP and have their own patrons in the Diet. Also, because Japanese have traditionally been leery of private investment firms and the stock market, the post office savings account is the preferred vehicle for squirrelling away yen–despite offering interest rates near zero.

With ´350 trillion in assets, Japan Post is the world's largest savings bank. It is also vital for government spending. Its pooled funds have been used to purchase some 25% of outstanding government bonds and, under a special ministry of finance account known as Zaisei Toyushi, they subsidize hugely expensive public works projects that are often derided as bridges to nowhere. Examples of wasteful spending on little-used infrastructure can be found throughout Japan, concrete monuments to a vast army of construction workers that lives off state largesse. Many Japanese in the sparsely populated hinterlands depend on the temporary jobs these projects create, and they are one factor that accounts for the LDP's nearly unbroken sway over the political landscape since the Second World War.

But the country faces a nasty hangover after decades of carefree spending. At more than 160%, Japan's ratio of public debt to gross domestic product is the highest of the world's developed economies. Observers such as the Organization for Economic Co-operation and Development see this mountain of debt, combined with a rapidly aging population (19.5% are 65 or over) and shrinking workforce, as a major obstacle to economic growth for years to come. Koizumi and other reformers insist the money sitting in Japan Post has to be used more wisely, and the private sector is the one to do that.

Despite a revolt by LDP lawmakers, the reform package he spearheaded in July narrowly passed the lower house, only to be rejected by the upper chamber. The package envisions gradual privatization of Japan Post from April 2007 through March 2017, dividing the corporation into mail delivery, postal savings, insurance and over-the-counter businesses, supervised by a holding company in which the government holds a more than one-third equity stake. Since the mail carrier service is plagued by deficits, partly from servicing remote communities, opponents of privatization fear some Japanese will lose an essential service if a for-profit entity takes over. Some LDP politicians have attacked Koizumi for ditching consensus politics and railroading the bills through committees. Many outside observers, though, believe privatization is a must for the economy. “Having too cheap money available for politicians is never good,” says Jakob Edberg, policy director of the European Business Council in Japan. “Having the funds work in more market terms would steer them into more effective uses. That's essential, given their huge size.”

Economists are looking at the effects of the sell-off in the short and long term. “There's no demand for funds in the private sector at the moment,” says Satoru Ogasawara, an economist with Credit Suisse First Boston in Tokyo. “So even if privatization takes place and money is available to the private sector, I don't think a privatized Japan Post could lend money to it.” Part of the reason is that Japanese companies are wary of borrowing, following the reckless days of the bubble economy in the late '80s and early '90s, and they have tried to reduce interest-bearing debt and cut capital spending. But as the economy comes out of its fourth recession since 1991–posting a third consecutive quarter of growth in April-June, with an annualized expansion of 1.1%–the Development Bank of Japan reported in August that major firms plan to expand capital spending by an average of 11.6% over last year, the first rise above 10% since 1990.

Over the longer term, though, postal privatization will be more important, largely because of demographics. “In the long run, say 10 or 20 years, the postal savings reform will impact Japan's economy,” says Takuji Aida, chief economist at Barclays Capital in Tokyo. “Because the Japanese population is aging, maybe in 20 to 30 years Japanese savings will be short compared to investment. The current account surplus may be gone, and the funds in the economy will have to be used more efficiently.”

Meanwhile, the near-term focus is on the election of Sept. 11. The debacle of the bills' defeat in the upper house has already spawned two small LDP splinter parties. One, Kokumin Shinto, is led by anti-reform, old-guard figures who galvanized the fight against privatizing Japan Post, and was hastily organized as a defence against popular female candidates–known in the Japanese media as “assassins”–that the LDP will field to run against them. Those dramatic developments have buoyed popular interest in the poll, though nearly 40% of respondents in the Nihon Keizai survey were undecided. While the opposition Democratic Party has been enjoying a resurgence in support, analysts such as Robert Feldman of Morgan Stanley Japan see Koizumi leading the LDP to another coalition majority. That would mean a clear nod to reform–and a likely rally in Japanese equities. “A strong win for Koizumi is a necessary condition for re-acceleration of reform, but not a sufficient condition,” Feldman wrote in a recent briefing.”On Sept. 12, investors will refocus on the uncertainties of getting legislation through the upper house. The picture may not be as bright as current consensus expects.”

Much will depend on whether postal reform opponents in the upper house, who will face re-election only after September 2006, when Koizumi plans to step down, agree to back a public mandate for privatization. With LDP unity deeply fractured, that's an unknown factor, but one on which the country's economic future could depend.