Postal reforms have some major risks,, especially to rural areas

The landslide victory of Japan’s Liberal Democratic Party (LDP) in the September 11th snap election signaled public support for Prime Minister Junichiro Koizumi’s most controversial reform plan: privatization of the Japan Post. The reform bill—to be set into motion in 2007, if passed—is meant to revitalize the economy by channeling money previously used for wasteful public projects into the more efficient private sector. There is little doubt that something must be done about this waste, yet this plan may not be the ideal solution. Koizumi’s opponents, to his left and to his right, argue that the troubles resulting from this reform may be more extensive than the benefits.

Supporting the world’s largest postal savings system, the Japan Post holds over $3 trillion in Japanese yen, amounting to about a quarter of all Japanese household assets. While proponents of privatization argue that this money could be put to better use in the private sector, there are certain facts that should be highlighted.

Privatization of the Post will eventually result in the closing of many post offices, for the newly privatized institution will have to answer to its new investors. Since loss-making outfits are likely concentrated in the rural areas, the closings will hit them hardest. Japan has been facing serious depopulation of rural areas due to the movement of the younger generation to urban areas; older generations are left behind in rural areas, where basic services—easily accessible in other regions—are only scarcely available. Since very few service industry companies own branches in such areas, these people have become highly dependent on the easily accessible post office for certain services, the most important being its role as a provider of savings accounts. Closings of rural post offices will have devastating effects on these communities (composed mostly of elderly citizens), not to mention the mass of employees who would lose their jobs as a result of large-scale restructuring. Even if some post offices decide to continue providing their services through convenience stores and ATMs, there will be no reason for them to create such facilities in areas that will produce little, if any, profit. In contrast, these facilities are more likely to be created in urban areas, where they are already present in large numbers.

Some extremist opponents of the reform claim that privatization of the Post could lead to subsidization by foreign companies; a few go even further, claiming that Koizumi is pushing this reform because, to put it crudely, he is an American stooge. These opponents point to the fact that the newly formed private companies will not have the security that a government-run institution has: they could be bought by other companies (foreign or domestic), or worse, go out of business. Look at the case of the Long Term Credit Bank of Japan (LTCB). From the time the bank went bankrupt in 1998 until it was purchased by America’s Ripplewood Holdings in 2000, $8 trillion in Japanese tax money (nearly half of which was used to make up for bad debt) was squandered to deal with the bankruptcy; Ripplewood, on the other hand, only had to spend a mere fraction of that amount to gain control of LTCB. If the privatized institution bogs down, which is not highly unlikely, it could follow the same fate.

In the past, Japan has privatized many government-owned firms with varying degrees of success. One such example is the 1980s privatization of Japan National Railways (JNR), which is now Japan Railways (JR). Though the formation of JR solved many problems that the railroad carried while it was publicly owned, the bureaucratic management system persisted, and excessive pressure was put on the employees in certain branches of the company. Its troubles were exposed when an April 2005 derailing accident killed over one hundred passengers. In addition, JR eventually started running its own deficits despite relieving the deficits of JNR. Though overall JR is considered to be a successful example, it demonstrates that privatization isn’t an instant solution to all such problems.

Precedents of postal reform exist in Europe and several other countries, the success of which displays a great degree of variation: Germany had a successful transition; New Zealand failed miserably and had to set up a new national financial institution. Due to the lack of sufficient number of precedents in countries with a similar system, there is great difficulty in predicting the outcome of Japan’s attempt. In addition, the reform will not be completed until 2017 – and only then if it goes as planned. By then, the political and economic climates could change dramatically. Japan is betting that this reform will not push Japan into stagflation, or “the nightmare scenario” according to critics. Such a problem in the world’s second largest economy would not only cripple the Land of the Rising Sun, but do immense damage to an already shaky global economy.