Japan Post IPO a painful delivery

From left: Mr Masatsugu Nagato, Japan Post Bank president, and Mr Taizo Nishimuro, president of Japan Post Holdings, at the listing ceremony last week with Mr Masami Ishii, president of Japan Post Insurance.
From left: Mr Masatsugu Nagato, Japan Post Bank president, and Mr Taizo Nishimuro, president of Japan Post Holdings, at the listing ceremony last week with Mr Masami Ishii, president of Japan Post Insurance.PHOTO: BLOOMBERG

Last Wednesday, Japan Post was privatised, with its banking and insurance units raising 1.44 trillion yen (S$16.7 billion) in the world's biggest initial public offering this year. The IPO comes after two decades of bitter political infighting, with some viewing it as a triumph of market forces and critics abhorring the route it was being taken.

In some rural areas, local postmasters act as de facto carers for an ageing population.

The privatisation has been one of the most controversial political issues of the past 15 years.

The IPO could spark a fight for more of the parcels business with private sector rivals.

The post office in Toyone village is a slab of bureaucracy encircled by Japan at its most gorgeous. Terraces of tea and persimmon climb off into dense cedar woods. Matriarchs wearing straw jerkins harvest leeks along a mountain stream. A blueberry farmer parks a barrow and wanders inside to buy stamps.

Hanging over this idyll, however, is an ideological battle from which Japan is still to fully emerge. Last Wednesday, Japan Post Holdings, Japan Post Bank and Japan Post Insurance were brought to market in the biggest IPO of this year. The country, and a unique institution, will be transformed forever.

  • Speed read

  • In some rural areas, local postmasters act as de facto carers for an ageing population.

    The privatisation has been one of the most controversial political issues of the past 15 years.

    The IPO could spark a fight for more of the parcels business with private sector rivals.

There are plenty who are delighted, but many others are horrified. For proponents, the IPO of Japan Post - the first of what are likely to be several tranches of the financial and logistics group - is an overdue triumph of market forces over waste and cronyism. But critics believe it is a capitulation of everything decent in Japan and a portent of a much diminished service.

For Prime Minister Shinzo Abe, facing questions over the effectiveness of his Abenomics economic revival plans, the IPO could be an uncomfortable bellwether if it does not create a new generation of shareholders. Some 75 per cent of the stock has been earmarked for individual Japanese investors, who now have a chance to buy a chunk of the most dependable brand in Japan, with a yield, at just over 3 per cent, far better than leaving the money in the Japan Post Bank.

POSTMASTERS AND THEIR POLITICAL POWER

None of this matters to Mr Yoshikazu Yoda, the postmaster of Toyone, in Aichi prefecture, 290km from Tokyo's stock exchange, who must just get on with delivering the mail.

"What we do will be the same universal service as always," says Mr Yoda, sitting in front of a miniature commemorative post box. "But it is true that for our customers, the Post Office, since privatisation (in 2007 when the process began in earnest)... has become a pain to navigate."

Less restrained critics of privatisation are more apocalyptic. It is quite certain, says Mr Shizuka Kamei, the one-time financial services minister - who a decade ago quit his job over his party's privatisation plans - that the post offices in Japan's countryside and islands will be closed by privatisation, and services vital to ageing Japan will be shed.

These anxieties are not unique to Japan, but in a country with the world's fastest-ageing society, it looms with special dread.

The shock waves of the privatisation could reverberate globally. The three-way IPO with the parent Japan Post Holdings listing alongside its banking and insurance subsidiaries, say analysts, should not be underestimated. One of the world's largest corporate businesses, by assets, could now be shocked into competing with its private sector rivals after decades of state protection.

At a minimum, the share sale - which is as much as five times oversubscribed according to bankers - could create a new generation of Japanese stock investors eager to hunt the domestic market and, perhaps, the wider world for risk. In preparation for the IPO, say sources at Nomura, ordinary Japanese are opening brokerage accounts at twice the rate they were this time last year.

Architects of the deal, who say they have closely studied the listed histories of Britain's Royal Mail and Deutsche Post, say the bank, once it is fully sold off in coming years, will be free to enter new business lines. The bank is already hiring executives from Goldman Sachs and elsewhere, and has a management that plans to take more investment risk with a larger proportion of the bank's deposits and become a significant global investor. Meanwhile, the legacy postal services, buoyed by the A$6.5 billion (S$6.5 billion) purchase of Australia's Toll group earlier this year, may attempt to morph into a global logistics empire.

The Post Office's sheer size and reach has, over the years, created vested interests that may prove heavily resistant to market forces. The 144-year-old institution is absolutely central to Japanese life: it is the country's most trusted brand; its biggest bank; the largest writer of life insurance policies. Its privatisation has been the focus of one of the country's single biggest political battle of the past 20 years.

Mr Yoda's post office is one of 24,000 in Japan. That is more outlets than the branch networks of all the country's national banks put together, and about 40 per cent bigger than the nation's largest chain of convenience stores. Its permanent staff number 240,000, and that rises to 400,000 when part-timers are included. When Mr Yoda tours his area, it will be on one of 86,561 bikes or 29,061 cars owned by the Post Office.

The customers who drop by - in Toyone's case, at a rate of about 30 a day - do so for a rich variety of postal services ranging from sending boxes of vegetables to offspring who have moved to the city, to sending the 1.8 billion New Year cards that criss-crossed the country last December. They come to bank, and have collective deposits of US$2 trillion (S$2.8 trillion) sitting in the Post Office's low-yield accounts, and they come as holders of Japan Post's 34 million life insurance policies.

But, while the numbers are significant, even its biggest fans question whether the postal service operation can survive in its current form, if stripped of subsidies from its banking and insurance arms.

That is why privatisation of the Post Office services can never work in the eyes of the old guard. Paternalism must be protected from the "arrogant villainy of Wall Street", says Mr Kobo Inamura, a former Japan Post board member.

"But how could anyone live without the Post Office?" says a female farmer when asked about the role of Mr Yoda in her life. "It's like having a big brother living next door."

The term "big brother" is unintentional, but potent. Quite apart from its economic and social importance, Japan Post remains a looming political titan. Thousands of rural postmasters who know everyone by name have been a formidable source of influence, and have loved that fact. Few states anywhere have an asset with tentacles that wrap quite so tightly around a nation's democracy, which is precisely why the reformers felt compelled to act.

KOIZUMI, ABE AND THE FADING OF THE OLD GUARD

The driving force behind privatisation was Mr Junichiro Koizumi, the prime minister who became single-mindedly committed to the project in 2003 and was forced to hold a general election in 2005 as a de facto referendum on the subject. He won. But the political damage to himself, and his party, was severe. Opinions differ on why Mr Koizumi staked so much on the single issue, but the campaign resembled a crusade to smash the old system of Post Office-enabled patronage that seemed, to reformers, to be blocking national progress.

It was at that 2005 election that the splits in the Liberal Democratic party (LDP) - which had held almost unbroken power for 50 years - became unmanageable.

Mr Kamei was among those who broke away from the LDP to fight against a collection of celebrity election candidates fielded by Mr Koizumi. The party struggled on until 2009 but, weakened in large part by the privatisation furore, then lost power to a Democratic party of Japan that set about diluting the privatisation plan. By 2010, the whole project was put on hold.

Although Mr Abe was peripheral to the original privatisation push, say political analysts, the IPO would not be happening now without him.

"It is remarkable how little resistance to this Mr Abe has faced from within his own party," says Mr Jesper Koll, a long-time Japan strategist and chief executive officer of Wisdom Tree Investments in Tokyo.

"Abe has engineered an iron grip and whether we like it or not, he and his team know about power," he says. "Koizumi had the popular vote, but the LDP elders stabbed him in the back. Here is Abe 10 years later doing this unopposed. If you are looking for a sign that Japan's old guard is dying away and that the way the hinterland used to work is now broken, this is it."

There remains the question of what Japan's largest company will look like after the IPO. For business rivals, like the delivery service Yamato, the whole thing is frightening. Some US$4 billion of the money from the IPO has been earmarked for reconstruction work in the earthquake-hit Tohoku region but the rest of the money has not been formally assigned.

Yamato and others fear a parcel price war is imminent and nobody has yet made it clear whether a listed Japan Post will lose its unique road privileges, which mean its vehicles can park anywhere and ignore one-way signs.

Professor Yuko Kawamoto, of Waseda University, says the view on postal privatisation lies in how you interpret the lives of postmasters. In the 1870s, when Japan was in the throes of modernisation, the government decided it needed to build a national postal network in a hurry. In its haste, it turned to the wealthiest or most influential figures in the towns and villages and made them postmasters.

"Over a century later, we essentially still have remnants of that feudal-type system in the Post Office and it was that power Koizumi was trying to break," says Prof Kawamoto. Unless the government completely sheds its stake, and it has not yet confirmed that it will do that, the break will not come.

For Mr Heizo Takenaka, the chief architect of privatisation under Mr Koizumi, Mr Yoda's day, and the fate of the savings that are deposited at his post office, back the arguments for privatisation.

"To reform Japan, we knew that what can be done by the private sector should be done by the private sector," he says. "A government organisation cannot take risks with all those savings assets and also, the business model of the post office is fragile because of Internet communication and falling revenues. They needed to develop growth areas, and could not fairly do that as a government organisation."

The intellectual abetters of privatisation, including Professor Naoyuki Yoshino of Keio University, who headed the government panel on postal reform in the 2000s, do not deny that Mr Yoda's life may change and post offices may vanish even though the services themselves are guaranteed by law.

THE FINANCIAL TIMES

A version of this article appeared in the print edition of The Sunday Times on November 08, 2015, with the headline 'Japan Post IPO a painful delivery'. Print Edition | Subscribe