Ellen Brown on Japan Post

Ellen Brown is the one writer outthere who has a clue of the importance of government involvement of centralbanking.

The Japanese problem is thenatural one of size, as it is in the USA. 

The solution happens to be boneheadedly simple.  Breakup central bankingand other such oversized financial operations on a sub regional basis.

The Bank of North Dakota has doneextraordinarily well as has the Canadian Banking System solely because theircredit is focused on their geographic markets. Had either deployed depositors’ money off to New York or Londonor anywhere else, they would have failed miserably.

Banking is all about geography;it is not about doing the largest loan or deal. We are slowly learning just that, and there is no reason whatsoever for aloan decision to a business in Timbuktu beenmade anywhere else except Timbuktu.

Yes, Japan needs to reform itsbanking system (since the private sector was demolished by gigantism) butcreating an effective series of state central banks is were reform starts.  Bigger has clearly failed again and again

That is also a lesson for the USA.  The central bank of OhioValley would revolutionize theeconomic future of the most important industrial zone in the USA, as would the central bank of California.

Somehow Ellen Brown needs to getonside with Sarah Palin to make this an issue for the 2012 election.  We need to end the present insanity.

Japan Post's stalled sale a saving grace

By Ellen Brown 

http://atimes.com/atimes/Japan/MD01Dh01.html

When a spokeswoman for the International Monetary Fund (IMF) said at a newsconference on March 17 that Japanhas the financial means to recover from its devastating tsunami, skepticalbloggers wondered what she meant. Was it a polite way of saying, "You'reon your own?"

Spokeswoman Caroline Atkinson said, "The most important policy priority isto address the humanitarian needs, the infrastructure needs and reconstructionand addressing the nuclear situation. We believe that the Japanese economy is astrong and wealthy society and the government has the full financial resourcesto address those needs."

Asked whether Japan hadasked for IMF assistance, she said, "Japan has not requested anyfinancial assistance from the IMF."

Skeptics asked how a country with a national debt that was over 200% of grossdomestic product (GDP) could be "strong and wealthy". In a CentralIntelligence Agency Factbook list of debt to GDP ratios of 132 countries in2010, Japan was at the topof the list at 226%, passing even Zimbabwe, ringing in at 149%.Greece and Iceland were fifth and sixth, at 144% and 124%. Yet Japan's credit rating wasstill AA, while Greece and Iceland were inthe BBB category. How has Japanmanaged to retain not only its credit rating but its status as the second- orthird-largest economy in the world, while carrying that whopping debt load?

The answer may be that the Japanese government has a captive funding source: itowns the world's largest depository bank. As US vice president Dick Cheneysaid, "Deficits don't matter." They don't matter, at least, when youown the bank that is your principal creditor. Japanhas remained impervious to the speculative attacks that have crippled countriessuch as Greece and Icelandbecause it has not fallen into the trap of dependency on foreign financing.

Japan Post Bank is now the largest holder of personal savings in the world,making it the world's largest credit engine.Most money today originates as bank loans, and deposits are the magic pool fromwhich this credit-money is generated. Japan Post is not only the world'slargest depository bank but its largest publicly owned bank. By 2007, it wasalso the largest employer in Japan,and the holder of one-fifth of the national debt in the form of governmentbonds.

As noted by Joe Weisenthal, writing in Business Insider in February 2010:

Because Japan'senormous public debt is largely held by its own citizens, the country doesn'thave to worry about foreign investors losingconfidence. 

If there's going to be a run on government debt, it will have to be the resultof its own citizens not wanting to fund it anymore. And since many Japanesefund the government via accounts held at the Japan Post Bank - which in turnbuys government debt - that institution would be the conduit for a shift tooccur.

That could explain why JapanPost has been the battleground of warring political factions for over a decade.The Japanese Postal Savings System dates back to 1875; but in 2001, Japan Postwas formed as an independent public corporation, the first step in privatizingit and selling it off to investors. When newly elected prime minister JunichiroKoizumi tried to push through the restructuring, however, he met with fierceresistance.

In 2004, Koizumi shuffled his cabinet, appointed reform-minded peopleas new ministers, and created a new position for postal privatization minister,appointing Heizo Takenaka to the post. In March 2006, Anthony Rowley wrote inBloomberg:

By privatizing JapanPost, [Koizumi] aims to break the stranglehold that politicians and bureaucratshave long exercised over the allocation of financial resources in Japanand to inject fresh competition into the country's financial services industry.His plan also will create a potentially mouthwatering target for domestic andinternational investors: JapanPost's savings bank andinsurance arms boast combined assets of more than 380 trillion yen (US$3.2trillion) ...

A $3 trillion asset pool is mouthwatering indeed. In a 2007reorganization, the postal savings division was separated from the postoffice's other arms, turning JapanPost into a proper bank. According to an October 2007 article in The Economist:

The newly created Japan Post Bank will be free to concentrate onbanking, and its new status will enable it to diversify into fresh areas ofbusiness such as mortgage lending and credit cards. Tosome degree, this diversification will also be forced upon the new bank. Someof the special treatment afforded to its predecessor will be revoked, obligingJapan Post Bank to invest more adventurously in order to retain depositors -and, ultimately, to attract investors once it lists on the stock market.

That was the plan, and JapanPost has been investing more adventurously; but it hasn't yet given up itsgovernment privileges. New Financial Services MinisterShizuka Kamei has put a brake on the privatization process, and the bank'sshares have not been sold. Meanwhile, the consolidated PostBank has grown to enormous size, passing Citigroup as the world's largestfinancial institution; and it has been branching into new areas, alarmingcompetitors. A March 2007 article in USA Today warned, "Thegovernment-nurtured colossus could leverage its size to crush rivals, foreignand domestic." 

Before the March 2011 tsunami, that is what it appeared to be doing. But nowthere is talk of reverting to the neoliberal model, selling off public assetsto find the funds to rebuild. Christian Caryl commented in a March 19 articlein Foreign Affairs, published by the Council on Foreign Relations:

As horrible as it is, the devastation of the earthquake presents Japan and its political class with the chance topush through the many reforms that the DPJ [Democratic Party of Japan]has long promised and the country so desperately needs.

In other words, a chance for investors to finally get their hands on Japan's prizedpublicly owned bank and the massive deposit base that has so far protected theeconomy from the attacks of foreign financial predators.

The battle of the banks

Before the 1990s, Japanwas the world's leading industrial and consumer goods innovator. The Japanesepublic-private model promised a high standard of living and leisure time forall, with much of the work done by robot-driven machines.

But Japanwas also the world's largest creditor, posing a threat to other internationalinterests. The Bank for International Settlement (BIS), the "centralbankers' central bank" in Basel, Switzerland, demonstrated in 1988 that ithad the power to make or break banks and economies when it issued a BaselAccord, raising bank capital requirements from 6% to 8%. Japan's banks wereless well capitalized than other banks, and raising the capital requirementforced them to cut back on lending.

Housing in Japanwas in a major bubble. The BaselAccord supplied the pin. When credit collapsed, so did the housing market,creating a recession in Japanlike that in the UStoday. Property prices fell and loans went into default, as the security forthem shriveled up. A downward spiral followed, ending with the total bankruptcyof the banks. The banking system had to be rescued by the government.Essentially, the banks were nationalized, although that word was avoided toprevent arousing criticism.

The Nikkei stock market crashed and took Japanese industries down with it. By2001, Western investors were finally able to penetrate Japanese markets thathad previously been closed to them, entering the merger-and-acquisition marketto acquire crippled Japanese enterprises. Major public companies were at least partiallyprivatized, including the railway, telegraph and telephone companies; but thegovernment resisted letting go of its vital postal service system.

'Japan'ssecond budget'

The history of the Japanese Postal Savings System (JPB) is detailed in a University of Leipzigdiscussion paper called "Behold the 'Behemoth': The Privatization of JapanPost Bank".

Founded in 1875, the postal savings banks were quite popular with the Japanesepeople, and Japan soon hadmore post office locations than the United States and other countries.Japanese postal savings banks specialized in offering small accounts forlow-income households, in competition with private savings banks that paidhigher interest rates but were considered less safe than the government's postalsavings system.

Postal savings banks were also attractive to savers because they offeredspecial time deposits called teigaku savings, or "fixed amountpostal savings", on quite favorable terms. These were 10-year timedeposits from which depositors could withdraw funds on short notice withoutpenalty, making them very liquid and reducing interest-rate risk. There was aformal limit of 10 million yen in postal deposits per individual or household,but it was not rigorously enforced; and wealthy savers could circumvent it byholding multiple accounts.

JPB formed the basis of a unique and opaque system of borrowing and lending,which operated as a "shadow" banking system sometimes referred to as"Japan'ssecond budget". Postal savings were channeled into government-relatedbanks or forwarded to various government-affiliated institutions, where lendingwas guided by the Japanese Ministry of Finance (MoF). Formalized after theSecond World War and named FILP, this system turned postal services into "ahuge, opaque pool for funding for various policy lending purposes".

Unlike the national budget, budget allocation to FILP did not requireparliamentary approval. Funds were channeled to local governments,government-affiliated public companies, and government financial institutionsacting as highly specializedlenders. Although manycountries have government-sponsored loan programs, the Japanese program wasremarkable for its size. By 2001, the FILP program involved over 400 trillionyen, a sum equal to 82% of Japan'sGDP.

 

That was the year JapanPost was formed as a newly independent public corporation; but it was stillowned by the government, and employees retained their status as public servants.New regulations encouraged government agencies that had relied on FILP loans to issuetheir own securities, and FILP agencies no longer had automatic access topostal savings funds. But JapanPost bought the bonds issued by the government agencies, and the flow of fundswas largely unchanged.

The battle over privatization

What followed was described by Christian Caryl in his article in

Foreign Affairs:

Under the Liberal Democratic Party (LDP) - the party whose cadres ruledJapan almost continuously from the party's formation in 1955 to its defeat in ageneral election two years ago - politicians, bureaucrats, and corporateleaders developed a powerful web of patronage and interconnected interests,which ended up funneling taxpayer money into public works projects ofdubious justification.

But ... Japan'spolitical culture began to change ten years ago, when Junichiro Koizumi, thenLDP's leader, won a remarkable election victory by vowing to dismantle hisparty's entrenched establishment and the vested interests that propped it up.(On the eve of the election, Koizumi famously declared that he would"destroy the LDP.") He pushed through a vital restructuring and privatizationof Japan Post, which is notonly Japan'spostal service but the world's biggest savings bank by assets and the source ofmuch of the funding for public works.

When Koizumi met with resistance, he vowed to "discipline"opponents. When the Upper House of the Japanese Diet did not pass hisprivatization bills, he dissolved the Lower House and called for a generalelection. A few weeks later, his postal privatization plans passed bothchambers of the Diet.

The privatization plan was begun in 2007 and was supposed to end in completeprivatization of JapanPost by 2017. Caryl observes:

Among its other effects, Koizumi's reforms expanded the political andcultural space for a genuine two-party system - an opening that was seized bythe Democratic Party of Japan,which had gradually evolved into a credible force since its formation in 1998.The DPJ is now led by Prime Minister Naoto Kan, who since the start of the currentcrisis, has failed to give an entirely convincing performance. He has oscillatedbetween forceful displays of leadership and indecisiveness.

The DPJ's indecisiveness was evident in its handling of JapanPost. The DPJ appointed Shizuka Kamei, the leader of a junior coalition partycalled People's New Party, as the minister responsible for the post office. MrKamei then proceeded to freeze the postal privatization. 

Michiyo Nakomoto, writing in the Financial Times onApril 5, 2010, said, "There was always going to be disagreement betweenthe DPJ, whose core members believe the post office's bank and insurance companies shouldbe scaled back to revitalize the private sector, and Mr Kamei's PNP, whoseprime goal is to expand the post office's influence." 

But Mr Kamei and his junior party had the upper hand in this debate. MrNakamoto wrote in the Financial Times on September 20, 2009:

Mr Kamei ... has been particularly vocal about the need to reversecourse on postal privatization. ... 

The minister has also been vocal on the need to support struggling small andmedium-sized companies, fuelling concerns that the government would adopt asocialist approach to the private sector.

Of particular alarm to some critics have been Mr Kamei's remarks suggestingthat the government would shelter SMEs [small and medium-sized enterprises]facing financial problems via a temporary moratorium on loan repayments.

"When the lender is in trouble, we will rescue them with taxes and whenthe borrower is in trouble, we will grant them a reprieve [on their loans].That is the natural thing to do," Mr Kamei told the Nikkei business dailyat the weekend.

In an April 2010 article in The Australian, Peter Alford called Kamei"the man who masterminded a major change to Japan's public finance arrangementsin the guise of restructuring postal services". Alford wrote:

It was accepted that he would halt and disable the previousgovernment's privatization program to separate and sell the bank and insurancebusinesses by 2017. 

But now, without any apparent consultation with ... other fiscal andadministrative policy ministers, he has moved to significantly alter privatesavings behavior and public funding capability.

.

The irascible 73-year-old Financial Services Minister proposed - well,demanded, actually - that Japan Post Bank's individual deposit limit be raisedto Y20 million ($230,000) and Japan Post Insurance's maximum policy coveragerise to Y25m.

In doing so, he has significantly expanded Japan Post's capacity to use thosesavings and premiums to finance public debt.

As of March 31 last year, 74% of the postal bank and postal insurer's combinedassets of Y303 trillion (that's right, $3,480 billion) were held in Japangovernment bonds (JGBs) and another 4% in local government bonds.

Utilizing the post office's 24,000 shop fronts, Japan Post Bank (the world'slargest savings bank) and JapanPost Insurance (the nation's largest personal insurer) held Y280.2 trillion ofdeposits and insurance reserves, equivalent to 19% of Japanese householdfinancial assets. ...

Kamei justified the move by saying, "The reality is we issue amassive amount of Japangovernment bonds and we need someone to buy them - we should be thankful thePost Office is willing to buy."

Kamei's bold move was good for the government and good for the people, but itsforeign and domestic competitors were not pleased. A coalition of organizationsrepresenting American, Canadian and European business interests objected thatthe proposal disregarded "international best practices to ensure equalcompetitive conditions" and raised "new and serious questionsregarding Japan'scommitment to fulfilling its international GATS [General Agreement on Trade inServices] obligations." 

Michiyo Nakamoto wrote in the Financial Times in May 2010:

In a last ditch effort to stall the expansion of Japan's post officebank, seven financial associations, representing all manner of private sectorbanks, on Thursday issued a joint statement opposing the government's decisionto significantly enlarge the bank's role in financial markets. 

The private sector banks are fuming at the government's decision to raise the maximumthat can be held in an account at thepostal bank from Y10m ($112,000) to Y20m and allow the lender into a widerrange of businesses than it has been permitted to engage in so far. 

They argue that the government's stake, which is currently at 100%, gives thepostal bank almost a state guarantee that will encourage depositors to shifttheir savings out of private banks into the post bank. They are also worriedthat the post bank, the country's biggest bank by deposits, will encroach onthe few profitable areas of banking business in Japan's sluggish economy.

Japan Post Bank started diversifying away from low-interest governmentbonds into more lucrative investments. InDecember 2010, sources said it was considering opening its first overseasoffice in London,"aiming to obtain the latest financial information there to help diversifyits asset management schemes."

But that was before the crippling tsunami and the nuclear disaster ittriggered. Whether they will finally force Japan Post's privatization remainsto be seen. Other vulnerable countries have sold off their assets only to windup in debt peonage to outside creditors. 

The Japanese government can afford its enormous debt because the interest itpays is extremely low. For the private economy, public debt IS money. A largepublic debt owed to the Japanese people means Japanese industries have themoney to rebuild. But if JapanPost is sold off to private investors, interest rates are liable to rise,plunging the government into the debt trap it has so far largely escaped.

The Japanese people are intensely patriotic, however, and they are not likelyto submit quietly to domination by foreigners. They generally like theirgovernment because they feel it is serving their interests. Hopefully theJapanese government will have the foresight and the fortitude to hang onto itscolossal publicly owned bank and use it to leverage its people's savings intothe credit neededto rebuild its ravaged infrastructure, avoiding a crippling debt burden toforeign interests. 

Ellen Brown is an attorney and president of the Public BankingInstitute, http://PublicBankingInstitute.org. In Webof Debt, her latest of 11 books, she shows how a private cartel hasusurped the power to create money from the people themselves, and how we thepeople can get it back. Her websites arehttp://webofdebt.com and http://ellenbrown.com.

(Copyright Ellen Brown 2011.)