April 2002

MoF's approach to the private sector banking crisis and the public sector financial crisis is very different. MoF distanced itself from the former (see Analytica "Japan's Banking Crisis"), while it has devised a detailed reform programme for the latter. The Trust Fund Bureau, now- FILP Fund, being located in the Ministry itself obviously made walking away somewhat impractical.

Public sector funds are: Postal Savings, yucho, (launched 1875), Postal Life Assurance, kanpo, (1916) and the now-EPI etc pensions (1941). MoF's TFB (1885) managed government monies and slowly encroached on MoPT and MoHW fund management prerogatives. TFB powers were finally defined clearly and broadly in 1951 and thus the FILP Budget and agencies were born.

In Japan, public goods and services are often provided, not out of general taxation, but by the FILP agencies each on an independent, albeit partially subsidised, funded budget employing interest bearing FILP loan capital. Forced to support the FILP budget by MoF, MoPT and MoHW struggled for control over "their" funds with MoPT the much more successful of the two.

At issue was not only bureaucratic turf, but also simple investment prudence. FILP investment projects tended to irrecoverability and poor transparency. Fixed assets of doubtful economic value, lending of questionable business rationale and capitalised expenditure proliferated. The public policy argument and the persistent amakudari/zokugiin abuse aggravated these problems.

Using privatisation and efficiency as cover, MoF launched its FILP reform programme which runs from 2001/02 to 2007/08. It has the flavour of the less-than-successful JNR Settlement schemes: what assets can be realised are and what cannot are funded by JGBs and amortised ad infinitum. Governance failure clearly occurred but is now only being addressed piecemeal.

FILP Fund assets at end-March 2001 were JPY439.7tr: JPY7.7tr cash and deposits, JPY73.4tr liquid market instruments, JPY314.6tr loans etc to FILP agencies and local government and JPY44.0tr loans to central government special accounts. FILP agency risk exposure is an estimated JPY543.9tr and still rising and some JPY130tr should be considered irrecoverable.

Positively speaking for financial agencies etc reform means: 1. full or effective privatisation or consolidation, 2. requirement of JGAAP, 3. requirement of BIS capital adequacy, 4. ALM sophistication, 5. portfolio management sophistication for yucho, kanpo, EPI etc and 6. a level playing field for all financial institutions and higher profit margins for private sector players.

For the enterprise agencies reform means: 1. full or effective privatisation or consolidation, 2. requirement of JGAAP, 3. restraint on amakudari/zokugiin abuse, 4. better prioritisation of the provision of public goods, 5. prudent management for the remaining heavily public policy oriented agencies and 6. greater reliance on general taxation to fund provision of public goods.

Negatively speaking reform means: 1. no clear initiative to resolve the saving public's concern, 2. consequently persisting weak consumer confidence and deflationary pressure, 3. refinancing of the FILP Fund by an issue of up to JPY250tr of FILP Bonds by end-2007/08 and 4. growing market participant unease about the new FILP Agency Bond as a bona fide investment vehicle.

FILP Reform is JNR Settlement by another name. It involves a large FILP Bond issue, confusion as to the true extent of Japanese public debt and limited progress on governance. Short term the IMF FSAP Japan and long term the new-Postal Services Corporation and MoHLW portfolio management independence and decided animus towards MoF will rock the reform apple cart.

Copyright 2002 by Analytica Japan - All Rights Reserved