A $3 Trillion Gamble; Koizumi aims to privatize the world's largest bank. Will consumers go along?

Byline: Christian Caryl and Hideko Takayama

When 83-year-old Tsuma Miyagawa wants to get her pension money or deposit cash in a savings account, there's only one place for her to go--the local post office. Most people in her hometown of Otaki, a remote village high up in the mountains northwest of Tokyo, do the same thing. For millions of elderly Japanese like Miyagawa, having access to one of Japan Post's 24,700 branch offices isn't just about sending the odd piece of mail; it's their only gateway to the country's financial system. "If I didn't have the post office, I don't know what I'd do," says Miyagawa. "It's my lifeline."

Until recently, there wouldn't have been any reason to worry about losing it. For more than a hundred years now, the Japanese postal system, with its banking and insurance arms, has been an economic and financial pillar in a risk-averse society. Now Prime Minister Junichiro Koizumi, the country's self-styled crusader for reform, wants to change that. Three years into his term, Koizumi has just shaken up his cabinet with an eye to achieving his most formidable campaign promise--privatizing Japan Post. The reformers aim to break up the existing postal service into its component banking, insurance and mail-delivery businesses. A fourth arm would administer over-the-counter services. The privatization plan is still being debated, but one core idea is to eliminate the government guarantee on Japan Post banking deposits, which could send consumers rushing to private banks with their money.

For Koizumi, this is no ordinary challenge. The Japanese postal service just happens to be the world's largest financial institution--a $3.2 trillion behemoth whose sheer government-protected weight puts private-sector rivals at a crippling disadvantage. Its Yucho postal-savings operation, originally established in 1876, now contains a staggering $2 trillion--30 percent of the country's individual savings deposits. That figure has actually been growing in recent years as cautious customers, spooked by reports of insolvency in the private-banking market, have rushed to take advantage of the blanket government guarantee on deposits. By comparison, the mere $1.2 trillion that Post customers have put into Kampo life-insurance policies looks like a trifle--but still amounts to a 40 percent share of the market, bigger than the next five private competitors combined. Like the postal savings arm, Kampo can offer products at favorable consumer terms thanks to government guarantees and tax exemptions.

If Japanese consumers can be persuaded to invest those funds in the private retail banks, the country's economy might never be the same. In the best-case scenario, huge amounts of pent-up household capital would be moved into private financial markets and help bolster Japan's incipient economic recovery. At worst, Koizumi's efforts could unleash financial chaos and, along the way, trigger full-scale revolt within his own party. Koizumi has hinted that he might counter the latter challenge by calling snap elections as early as this year--thereby holding a gun to the head of his political rivals.

It may not come to that, but no one is doubting Koizumi's seriousness. With characteristic bravado, the prime minister has referred to postal-service privatization as "the biggest reform in Japan since the Meiji era," the late-19th-century period when the country emerged into the modern age. In September he shuffled his old cabinet, installing reformist allies in every key policy position. They've pledged to push ahead with postal reform come what may. The point man is Economic Minister Heizo Takenaka, the former professor who, by dint of his success in overhauling Japan's banking system, is the star of Koizumi's daring agenda.

In purely economic terms, postal reform would seem a winner. But the postal system has been a feeding trough for a variety of formidable interest groups for decades, and they aren't going to go hungry without a fight. To start with, Koizumi has said that he'd like to see the postal service's 280,000 full-time employees (and an additional 120,000 part-time workers) shed from government payrolls. (A whopping third of all the country's civil servants work for Japan Post.) Needless to say, their well-organized postal union hates that idea. And then there's the ...