This morning, Japan Post Bank announced plans to double their deposit limit from 10 million to 20 million yen. Japan Post Bank is the country’s largest postal service operator and also its largest financial institution. With financial assets of 300 trillion yen or the equivalent of US$3 trillion, their holdings exceed the entire GDP of France. They are also 1.5 times larger than Mitsubishi UFJ Financial Group, the country’s largest private bank. Therefore as you can imagine, even though the Japanese Yen barely reacted to the announcement, decisions by Japan Post can and will have a long term impact on the financial markets.
Japan Post Could Invest New Deposits in Treasuries
Approximately 75 percent of the funds held by Japan Post are invested in Japanese government bonds. Since their privatization launch in October 2007, they have been looking to diversify the assets collected from postal savings deposits. In the fourth quarter for example, they bought Y300 billion or US$3 billion worth of U.S. Treasuries. Their holdings of foreign securities increased by Y2 trillion over the past year which is large in absolute terms but small compared to Japan Post’s overall holdings. However if Japanese citizens take advantage of the higher deposit limits, Japan Post could find themselves flush with cash and they will in turn be looking for a place to invest. This could create fresh demand for U.S. Treasuries and foreign bonds denominated in euros, yen or any other higher yielding currencies.
Japanese Bankers Call the Decision Unfair
Although Japan Post lifted its official guarantee for deposits, many depositors believe there is still an implicit guarantee since the bank is state owned. As a result, Japanese Bankers have called the expansion unfair because it creates a competitive advantage. The bank’s primary motivation for increasing the deposit is to raise enough funds to operate uniform financial services nationwide but with Y40 trillion yen or US$400 billion in Japan Posts deposits expected to mature this year, the bank may also fear that the country’s aging population will shift their money out of Japan in search for yields. There has already been a sharp increase in demand for foreign currency denominated mutual funds – the holdings of these funds in Japan increased 31 percent in January and 25 percent in February from the prior year. If Japan Post is successful at keeping some of this money at home, there could be less downside pressure on the Yen when the deposits mature.
The Japanese government will also decide on Wednesday whether or not to privatize the bank. In all likelihood, privatization plans will remain on hold. The government will most likely sell a portion of their holdings, which allows them to retain the power to veto any major changes in the bank.