TOKYO Japan scaled back plans to privatize the world's biggest financial conglomerate on Wednesday to keep control of the state-owned group, opening the way for it to buy more government bonds.
Japan Post, which provides postal, banking and insurance services, holds about a third of the 700 trillion-yen government bond market and dealers bet that a doubling of deposits under the privatization plan would translate into more bond buying.
That could provide a crutch for a government that issued a record amount of new bonds in the financial year to the end of March and which faces a public debt burden running close to 200 percent of GDP, the highest in the developed world.
Banking Minister Shizuka Kamei said the plan was not intended to create a megabank to regularly buy Japanese government bonds, but that view met with skepticism in some quarters.
"This is essentially a move to put money back to the public sector from the private sector. Japan Post money will be used to support public finance," said Kazuo Ishikawa, senior research fellow at Tokyo Foundation.
The JGB yield curve flattened on the prospects that Japan Post could become a bigger buyer of JGBs. The five-year to 20-year spread tightened 1.5 basis points to 163 basis points, shrinking from a decade high above 167 basis points earlier this month.
Japan Post is the world's biggest financial institution, based on the assets declared in earnings reports. It has financial assets of about 300 trillion yen ($3.3 trillion) -- more than the GDP of France.
The proposal of the six-month old Democratic Party government of Prime Minister Yukio Hatoyama overturns a plan that the charismatic Junichiro Koizumi had begun rolling out when he led a Liberal Democratic Party government.
The previous plan envisioned spinning off the two financial subsidiaries, Japan Post Bank and Japan Post Insurance, and selling two-thirds of the holding company by 2017.
Hatoyama froze that plan on the grounds it ignored the needs of consumers, saying it focused too much on profits and had already led to the closures of local post offices.
Under the new plan, the government will retain more than one-third of the shares of Japan Post's parent company, enough to allow the government to veto any major changes at the firm.
"Essentially, Japan Post will be a government-run company," research fellow Ishikawa said.
The plan allows Japan Post to roughly double the limit on the size of the company's deposits and insurance underwriting by June, although it may review that around April 2012 depending on the impact the changes have on the banking sector.
The plan has to be sealed by the cabinet and then parliament, but National Strategy Minister Yoshito Sengoku called for a rethink on doubling the deposit limits.
Bond dealers said the measures could draw funds from other banks into Japan Post accounts, especially as it is perceived as having an implicit government guarantee as a state controlled firm.
Assuming Japan Post maintains a practice of investing roughly three-quarters of its financial assets in JGBs, the news is bullish for bonds, they said.
"The new plan is supportive to longer-dated Japanese government bonds as the duration of bond holdings in Japan Post Bank's portfolio is said to be longer than other banks. Japan Post Insurance is a life insurer so it is expected to invest more in longer-dated bonds," said Chotaro Morita, head of Japan fixed-income strategy research at Barclays Capital.
Although Japanese interest rates have been close to zero for much of the past decade, Japanese savers have been reluctant to take risks in shares and foreign assets, preferring to put most of their savings on deposit in Japan.
Only 1 percent of total household assets in Japan are held in foreign currency or foreign securities accounts.
Otsuka said it would be up to the management of Japan Post to consider its investment stance but added it would be difficult for Japan Post to cut its government bond weighting near term.
Indeed, analysts said it was unrealistic for Japan Post to reduce its bond holdings because that could destabilize the market at a time when it is trying to cope with a sharp increase in government bond issuance.
Otsuka said the government is likely to reduce its Japan Post stake in the future but had not decided on a timeframe.
Japan Post's financial services are considered the golden goose because the traditional demand for mail services is under pressure from increased use of electronic mail and Japan's shrinking population.
As a state-backed bank, Japan Post Bank has long had a deposit limit of 10 million yen per person. But the government said it would double that to 20 million yen to support its profitability.
The government also plans to merge deliveries and post office services into the parent company, hoping that profits from the two financial firms will subsidize deliveries and post office services.
(Reporting by Hideyuki Sano and Noriyuki Hirata; Editing by Neil Fullick)