SAT analogy question pop quiz:
Postal Service is to Japan as _________ is to the United States.
A) Son of Sam
B) United States Parcel Service
C) Social Security
D) Newman! (from Seinfeld)
Answer: C. The Frankenstein of all government agencies, believe it or not, is Japan's Postal Service, which also functions as a kind of ad hoc public savings system. Ok, that's kinda weird, and an interesting factoid. But why should we care?
Investors should take note because Japan Post is the world's largest savings bank…and it's going private. Later this year, Japan Post will be broken up into four parts – mail delivery, post office branches, postal life insurance and postal savings. At least two of the units, postal life insurance and postal savings, are scheduled to go public in 2009, and the government will unload its entire stake in both within five years of their public listings. This means the postal savings juggernaut will be competing with private financial firms on equal competitive footing by 2014!
Eventually, Japan Post will be a formidable competitor to Japan's private banks and a big player in the global investment community. The postal system has 120 million savings accounts with some ¥ 187 trillion ($1.6 trillion) on deposit. In essence, it's among the world's largest investment funds.
The balances in postal savings accounts represent a significant opportunity for asset managers. Approximately 75% of postal savings are currently invested in government, municipal and government guaranteed bonds. But that will likely change as the new private company seeks higher yields in the form of equity and international investment.
Some see this as a risk—a new surge of liquidity will drown capital markets. But we doubt it. There's no surprise power in this event for markets, the news is already priced in. Besides, this is what we'd call a truly "glacial" event. It's going to happen slowly over the next 7-10 years…plenty of time for markets to adjust without hiccups.
We see this as a great thing. If successful, Japan's endeavor to privatize savings could be a tremendous example for the rest of the world. Currently, currency deposits and low-yielding government bonds comprise over 70% of Japan's household assets. As postal savings assets seek higher yielding investment options, other Japanese financial institutions will be forced to seek better options for their clients' assets as well. The result will be higher returns for Japanese households and a more efficient use of capital in Japan's economy. Getting that money out of the government's hands and into private hands is stupendous.
Besides, would you really trust Newman with your retirement savings, anyway?