Japan’s IPO of the century

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Japan’s IPO of the century

Prime Minister Shinzo Abe likes to say Japan is back in business. His case got a big boost last Thursday with news that the country’s biggest initial public offering this century - the $11.6 billion listing of behemoth Japan Post - will go ahead this November. The share sale isn’t just a sign that change is afoot in the Japanese economy: It should help propel that process.

Japan Post’s long journey to the private sector began in 2001 when Junichiro Koizumi, Abe’s mentor, was prime minister. In his drive to end the cronyism and complacency that plagued the Japanese economy, Koizumi went right to the source: the savings institution within a postal system that then employed over 400,000 people. Japan Post was the piggy bank wayward politicians used to fund pet projects, many of them white elephants, which helped feed an explosion in public debt.

The privatization couldn’t have come at a more opportune moment. Even Nobel laureate Paul Krugman, an early Abenomics cheerleader, said this week that he’s “really, really worried” about Tokyo’s chances of ending a two-decade slump. The hope is that the listing, which will be targeted at individual Japanese, will encourage households to invest more of their savings. Perhaps more important, it could enliven the country’s stagnant banking sector.

Japan is among the developed world’s most overbanked nations, with more than 100 sleepy regional players (84 of which are publicly traded) servicing 126 million people. Thanks to the Bank of Japan’s zero-interest-rate policies, profit margins are shrinking even faster than the population.

The solution, of course, is consolidation. Stronger, bigger and more profitable regional banks would increase Japan’s risk profile and encourage lending. It also would spread the benefits of Japan’s 0.8 percent growth beyond Tokyo and Osaka. Regulators have employed a similar strategy with Japan’s three “megabanks,” encouraging them to take greater risk with their balance sheets.

Getting Japan’s proud banks - some dating back a century - to join forces has been a slow, tortuous process. All CEOs want to be the acquirer, not the one bought. And all want their name on the door. Ever wonder how executives arrived at the wildly convoluted name Bank of Tokyo-Mitsubishi UFJ? That’s what happens when you bundle a handful of decades-old institutions that refuse to see their brand disappear. Odd as it sounds, this is among the key reasons today’s CEOs are reluctant to merge. They see their job as protecting a bank’s legacy, not scrubbing the name from the letterhead.

Enter Japan Post. Its IPO will unfold in phases and the $11.6 billion total includes the holding company, the bank and the insurance unit. After the listing, the government will still own almost 90 percent of the Japan Post Bank. Still, as a for-profit institution, it’ll have to start focusing more on lending rather than simply taking deposits and paying interest. That will present stiff competition to regional banks in particular: Their CEOs will have no choice but to seek partners - or lifeboats.

Sure, the banks’ first response will be more cost-cutting, as well as attempts to improve efficiency and make better use of technology. That won’t be enough, says Moody’s analyst Shunsaku Sato.

“Cost-cutting efforts have only offset around one-quarter of the decline in the banks’ net interest income, and around one-third of the slowdown in net fees,” Sato says.

The shrinkage of margins has accelerated since BOJ Governor Haruhiko Kuroda launched his quantitative-easing experiment in 2013. That’s proved to be an unexpected headwind. Fewer profits are making bankers even more timid about extending loans, starving Japan of the multiplier effect that makes monetary policy so potent. The sudden surge in competition that accompanies Japan Post’s lending efforts should strengthen the BOJ’s transmission mechanism.

Yes, banks are comparatively healthy again. Around the time Tokyo began privatizing Japan Post, it was pouring some $100 billion into 54 shaky financial institutions and disposing of bad loans. Only this year did the last of them - Resona Holdings - repay its public funds in full. But banks remain semi-paralyzed by the “deflationary mindset” Kuroda is trying to change.

Japan Post’s arrival poses problems, too, including how to deal with the implicit government guarantee of deposits it enjoys. Admittedly, that gives Japan Post an unfair advantage. But if it catalyzes regional banks to become more nimble and resilient, then Abe’s odds of putting Japan back in business increase exponentially.

*The author is a Bloomberg View columnist based in Tokyo and writes on economics, markets and politics throughout the Asia-Pacific region.

by William Pesek
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