How did a postal savings system with a balance of Japanese yen 15,000 in 1875 grow into a Japanese yen 440 trillion (US$3.43 trillion) octopus of public-sector agencies and companies so large that there is virtually nobody who can see the whole thing? How does Japan now plan to dismember this ungainly beast? Fascinating questions both. To answer them is to understand a lot more about Japan's apparent paralysis in the past decade and what it's going to look like -- as a society, an economy, and a market -- when its current reform process is completed.
A thumbnail history begins with the postal savings system now 127 years old. The original model was Britain's, in which citizens could open savings accounts at post offices. The system added postal life insurance in 1916, an embellishment of the British system, and an enforced pension plan in 1941 as part of the war effort. This is the origin of what is now the world's largest single pool of pension assets.
In 1951 came the crucial event: The strapped postwar government began raiding the system's funds to finance other public sector agencies and corporations. Japan has been saddled with a so-called second budget -- huge, amorphous, poorly measured and managed -- ever since.
Highway corporations, a scholarship foundation, rural development, small-business and municipal enterprise corporations, a "green resources" company, a mining agency, airport authorities -- these are among the vast array of entities now funded under the Fiscal Investment & Loan Program at the Ministry of Finance. While they are free to raise their own money and credits, they are financed largely through the FILP fund by the postal savings and insurance system and the national pension plan.
The FILP system is unique -- you won't find anything like it anywhere else -- and to a certain extent logical. But helter-skelter growth and lack of supervision almost inevitably led to problems.
"Crucially, there was a systemic failure of governance: no clear locus of accountability and no agreed schema of transparency," writes Stephen Church, whose "Public Sector Reform in Japan" was just published by Analytica Japan, a financial research consultancy.
And here we are. Japan's public sector is a sprawl of vested interests controlled by zoku, or tribes, in the national Diet.
It's home to thousands of former ministry bureaucrats who "descended from heaven" by way of the so-called amakudari system. It's also home to what Church reckons to be a risk exposure of Japanese yen 545 trillion, of which at least Japanese yen 129 trillion is irrecoverable.
It's a mess, all right -- a huge mud puddle that remains hard to see even though it remains right in front of us.
Now for the way out of the mess. In a policy being carried out in steps from 2001 to 2008, FILP's traditional sources of funds will be replaced by two types of bonds. Stronger public entities will issue their own as an interim step toward privatization. Others will rely on new bonds issued directly by the Ministry of Finance -- in effect, Japanese government bonds.
Begun last year, FILP reform has already made a measurable dent in the agency's budget. The target for 2008 is to cut FILP's balance sheet by at least 20 percent. That will require Japanese yen 250 trillion's worth issued by the Ministry of Finance itself, roughly Japanese yen 20 trillion's worth of bonds issued by FILP agencies, and the beginning of what will be a lengthy loss-amortization period.
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