Japan: Economics in Everyday Life

22. How Does Japan’s Largest Bank Work?

22 How Does Japan’s Largest Bank Work? Toshiki Jinushi According to Fortune magazine, the three largest banks in the world in 1995 were Dai-Ichi-Kangyo, Tokyo-Mitsubishi, and Sakura. Not many outside Japan know of an even bigger bank—the Japanese Postal Savings Office (PSO). With its deposits of over 200 trillion yen (2 trillion U.S. dollars) in mid-1995, PSO is much larger than the three largest banks in the world combined. And its share of Japanese deposits has been rising. The PSO has 24,500 branches throughout Japan. Being part of the Japanese Ministry of Posts and Telecommunications, every post office in the country doubles as a branch of this bank. In contrast, even the largest of the commercial banks have only six or seven hundred branches. The ten largest commercial banks and the sixty-four regional banks in Japan have 19,000 branches combined. In rural areas, the PSO has little competition. But why have the commercial banks not driven it out of business in the urban areas, where most Japanese live today? On the contrary, starting from about 10 percent of deposits in the early 1960s, the PSO was able to account for about 45 percent of deposits in 1996. 167 Popularity of the Postal Savings Office Since the PSO is backed by the full faith and credit of the government of Japan, depositors prefer to keep their money in the PSO, especially during times of economic uncertainty. Until quite recently, the PSO consistently paid higher interest rates on deposits than the commercial banks. Lower risk and higher return is an unbeatable combination in investment markets. In addition , the PSO enjoys great economies of scale; it also doesn’t have to pay taxes, stamp duties, or deposit insurance, and is able to offer products and services commercial banks cannot match. Its “fixed amount deposits” (teigaku deposit certificates), for example , pay a higher rate of return and provide greater liquidity than the time deposits offered by private commercial banks. Fixed-amount deposits are long-term savings deposits in standard denominations (e.g., 10,000 yen denominations) with tenyear maturities, but can be withdrawn with only a minor penalty six months after the date of deposit. Because of their popularity , fixed-amount deposits now account for almost 90 percent of the postal savings deposits. Until recently, commercial banks were barred from offering a similar product. By contrast, term deposits offered by commercial banks were limited to a maximum maturity of only two years, and they offered lower interest rates. Some commercial banks and credit unions recently announced plans to offer a term deposit similar to that offered by PSO, but it will take time for them to erode PSO’s dominant market share. Another reason for the large size of the PSO is that it does not compete with the commercial banks on a level playing field. Indeed, it holds the upper hand. The Ministry of Posts and Telecommunications, of which the PSO is a part, eagerly encourages innovation by the PSO to expand and improve services to its depositors. The PSO is regarded as the most depositororiented bank in Japan. It charges no fees for use of its automatic teller machines outside the normal business hours, and offers the lowest-cost money transfer service (which is especially 168 Japan: Why It Works, Why It Doesn’t valuable in Japan, where there are no personal checking accounts ; see chapter 9). The high efficiency of its three main services —mail, deposits, and insurance—can be attributed to its ability to share the cost of facilities and staff among the three services. On the other hand, the Ministry of Finance, which regulates the commercial banks, emphasizes the stability of the financial markets as its primary goal. The Ministry of Finance has tried hard to stifle competition among the commercial banks by its sluggishness in permitting them to introduce new products. As a result, commercial banks have functioned under cartel-like coordination to the disadvantage of their depositors. The presence of the PSO helps limit the monopoly power and cartel-like behavior of the commercial banks. Where Does the Money Go? The PSO takes deposits but, in principle, it does not make loans. Instead, it turns over almost all of its funds—deposits as well as insurance premiums—to the Fund Management Bureau of the Ministry of Finance for investment. Not being an incorporated full-service...