Will Japan's postal savings system spring a $1 trillion leak?

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Will Japan's Postal-Savings System Spring a $1 Trillion Leak?

The prospect of a huge shift out of the state-controlled accounts has the financial markets unhinged

In Japanese financial circles, it's the $1 trillion question. That staggering sum may flow out of the state-controlled postal-savings system over the next two years, as Japanese seek higher returns for their household savings elsewhere. Since nobody is quite sure where that money would go, however, all sorts of financial-meltdown theories are budding in Tokyo these days -- along with Japan's fabled cherry blossoms.

Like so many of Japan's idiosyncrasies, this one is rooted in tradition. Japanese post offices have doubled as deposit-taking institutions for more than a century. Originally, this was convenient for small-scale savers who lived in the countryside and didn't have easy access to bank branches. Not coincidentally, it also gave the government a huge war chest to finance its industrial policies.

Today, the system is the 800-pound gorilla of Japanese finance. Some 20% of Japan's household savings, about $2.5 trillion, is now locked up in the postal-savings system. Trouble is, about $1 trillion of that is at risk because all sorts of 10-year time deposits that yield 5% to 7% will start to mature in the fiscal year 2000 starting on Apr. 1, and in 2001.

With Japanese interest rates hovering near zero, the betting is that savers will get wise and roll over that money into investments offering better returns. But where? Here's a sampling of the theories making the rounds:

U.S. Treasuries, Anyone? Call this the capital-flight scenario. Savers figure that Japan's economy will go nowhere for years, ditto for interest rates. With long-term Japanese government bonds yielding about 2%, compared with 5% to 6% for U.S. Treasuries, Italian, and German bonds, the smart money heads overseas to lock in these higher returns.

All that cash rushing out of yen assets would clobber Japan's currency. Depending on the timing, that might be a good deal for investors: Not only would they benefit from the higher interest rate spread, they would get the added bonus of repatriating their profits from a stronger foreign currency into a weaker one, namely yen.

But I wouldn't short the yen just yet. Your typical postal-savings depositor in Japan isn't a high-flying global investor. If they're going to punt at all, it's likely to be closer to home.

Nikkei Takes Flight. Over the last year or so, the foreign investors betting on a Japanese recovery have pushed the Nikkei up from depressed levels to around 20,000. It could go a lot higher if a big chunk of the postal-savings exodus went into the Japanese stock market.

Just about every broker in Tokyo is salivating at that prospect. With 401(k)-style pension plans coming to Japan next year, the market could indeed get a nice lift as anxious workers start shifting savings into stocks to fund their retirements.

The betting is that maybe $400 billion in postal savings will be recycled into risk assets, namely equities. I think this theory does hold water, but don't count on the Nikkei jumping back up to its 1989 peak of nearly 40,000 any time soon. Individual investors in Japan don't swing the markets the way they sometimes do in the States. Any shift probably will be gradual. What's more, before a roaring bull market can materialize, investors will want greater evidence that Japan has turned the corner. That isn't there yet.

Bond Market Jitters. One big reason for the slow recovery is that a bond-market crash could seriously spoil the economic outlook. Japan's long-term interest rates have stayed low, despite a big runup in the central government's budget deficit, now clocking 10% of gross domestic product. Japan's postal savings are managed by the Trust Fund Bureau of the Finance Ministry. In recent years, it has recycled those funds into the bond market. But if all or most of that $1 trillion heads for the exits, the long-term rates could spike up to 4% to 5%.

That would increase the cost of future government borrowing and hurt companies still trying to clean up their balance sheets. In short, Japan's whole economic recovery would be put in jeopardy. Government officials are praying that savers will keep their money in the postal-savings system, even if their deposits yield only 1%.

Staying Put. That's not as crazy as it sounds. Again, the consensus is that maybe $400 billion of that $1 trillion will leave the postal-savings system. But it may not be that much. In a perverse way, Japan's legacy of rigged and insider-biased markets has made individual investors extremely cautious. They like to know their savings are safe, even if they're getting shafted on returns.

It could turn out that all the nail-biting about a coming financial meltdown is overblown. Then again, who knows? These are the risks the government assumes when it intervenes so heavily in the management of Japan's massive savings pool. And it lends credibility to reformers who have argued for years that the whole system is hopelessly out of date for an economy as big and rich as Japan's.

Until the entire postal-savings kitty -- now some $2.5 trillion -- is put into the hands of private fund managers and harnessed to more productive uses, the Alice-in-Wonderland logic of Japan's financial markets will continue to perplex the world.


-- - (x@xxx.com), March 30, 2000

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