UPDATE 2-Japan scales back privatisation of behemoth bank

* Govt plans to retain more than third of Japan Post shares

* Plans to lift deposit limit to 20 mln yen vs 10 mln yen

* Government bond yield curve flattens on news

* Government not decided on deadline on share offers
(Adds more comments)

By Hideyuki Sano

TOKYO, March 24 (BestGrowthStock) – The Japanese government has
scaled back its privatisation plan for Japan Post to hold more
than a third of its shares, keeping a grip on the mammoth
state-owned financial conglomerate that is the single largest
holder of government bonds.

Japan Post is the country’s biggest financial institution,
with financial assets of about 300 trillion yen ($3.3 trillion)
— more than the GDP of France.

It holds about a third of the near 700 trillion yen
Japanese government bond (JGB) market, thus making it
potentially pivotal in supporting Japan’s deteriorating public
finances.

The six-month old Democratic Party-led government said it
plans to roughly double the limit on the company’s deposits and
insurance by June, although it may review that around April
2012 depending on the impact the changes have on the banking
sector.

Bond dealers said the news supported government bond prices
on Wednesday on the view that the increased deposit limit would
draw funds from other banks to Japan Post that would then be
invested in JGBs.

“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.

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. [ID:nTOE62N01Z]

However, Vice Banking Minister Kohei Otsuka said he does
not expect Japan Post’s assets to grow sharply given that
average financial savings of Japanese households is about 11.2
million yen, only just above the current 10 trillion yen
deposit limit.

Although Japanese interest rates have been kept near zero
for much of the past decade, Japanese savers have been
reluctant to take risks in shares and foreign assets, prefering
to put most of their savings on deposit in Japan.

Only 1 percent of total household assets in Japan are held
in foreign currency (Read more about trading foreign currency. or foreign securities accounts.

Awash with funds, banks in turn have been buying government
bonds, helping to keep government bond yields low despite
Japan’s dire fiscal condition.

Banking Minister Shizuka Kamei said on Wednesday the plan
is not intend to create a megabank to regularly buy Japanese
government bonds.

But most analysts think it is unrealistic for Japan Post to
reduce its bond holdings as it could destabilise markets.

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 reduce the weighting on government
bonds in the near term.

BACK-PEDALLING?

Prime Minister Yukio Hatoyama had frozen the previous
privatisation plan, seen as the symbol of former prime minister
Junichiro Koizumi’s market-friendly reforms, on the grounds
that it ignored the needs of consumers.

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.

Otsuka said the government will likely reduce its holding
of Japan Post’s shares in the future but has not decided
whether it would set a deadline to do so.

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.

The government also said it planned to keep over one-third
of the shares in the parent company of Japan Post.

It plans to merge deliveries and post office services into
the parent company, hoping that profits from the two financial
firms will subsidise deliveries and post office services.

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 aimed to lift that to 20 million yen to support its
profitability.

Private banks have said that would give Japan Post an
unfair competitive advantage given that Japan Post Bank is
larger than any other banks in the country and still enjoys an
implicit government guarantee.
Money

($1=90.17 Yen)
(Reporting by Hideyuki Sano and Noriyuki Hirata; Editing by
Hugh Lawson and Neil Fullick)

UPDATE 2-Japan scales back privatisation of behemoth bank