The privatization of Japan Post [see ‘Whale in a pond’ makes a break for open waters] will create the world’s largest bank by assets, although the real cause for celebration should be the promised end to the curse of pork-barrel politics that has involved savers’ money being channelled through government bonds into expensive and often quite useless public works projects. Outgoing prime minister Junichiro Koizumi can be rightly proud of this hard-won reform but market participants in Japan are already expressing concerns about how the privatization is being handled and what kind of an investor the new postal savings bank – Yucho – will be.
Yucho itself has made ambitious profit forecasts, saying it will make ¥428 billion ($3.6 billion) by 2008. There’s no baseline figure for comparison but the figure seems high given that the bank is adding to rather than subtracting from its roster of more than 250,000 employees; it will not immediately roll out any new services; and it does not seem to have a clear strategy in place for diversifying away from increasingly risky inflation-linked products. Low-yielding government bonds account for more than half of the bank’s portfolio, and it is unlikely that Japan’s comparatively small high-yield bond market will be able to support all of Yucho’s demand for higher-yielding securities. The firm needs to hire top fund managers who will not be afraid to take foreign risk and, eventually, credit risk. It needs to find a way to give them licence to invest in more profitable products without putting its traditionally risk-averse savers off.
Full privatization is scheduled for 2011. By then the bank will have had to tell investors in its shares a convincing credit story. The precedents set by financial institutions in Japan approaching Yucho’s size have not been entirely encouraging. Japan’s megabanks have often been accused of being too large and too conservative to reform at the pace they ought to. They have tended to recruit too many professionals from within and rely on their extensive networks of longstanding client relationships rather than innovative business practices. Yucho will be twice the size by assets of the largest megabank, Mitsubishi UFJ, and might have a hard time selling its stock unless it can demonstrate a clear investment plan and a commitment to dynamic and transparent management that rewards merit rather than seniority.
There is much to be excited about in Japan. Yucho’s entry into the retail market ought to put some pressure on the country’s proliferation of inefficient regional banks to improve or consolidate, and the fact that the megabanks have at least cleared their books of the bulk of their non-performing loans means that they too are well placed to get better if sufficient managerial will exists.
Early indications are that new prime minister Shinzo Abe will not have quite the focus on economic reform as his predecessor had, but if Yucho can forgo bureaucratic indolence and over-conservative investment strategies in favour of a cautious but clear-sighted and market-driven approach it could herald a new era in Japanese banking.
