Markets

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

When a company with a small public float sells stock, it should be reason to cheer. Not so with government-owned Japan Post Holdings Co., the country's largest deposit-holder and insurer, whose shares are set to flood an already disgruntled market.

Not Delivering
Japan Post and its listed units' shares have underperformed the broad market since going public on Nov. 4, 2015
Source: Bloomberg

The company, made up of Japan's post office plus banking and insurance units, plans to sell 1 trillion to 1.4 trillion yen ($9.1 billion to $12.8 billion) in new shares to local and overseas investors by the end of September. Unless it's delayed by heightened tensions over North Korea, this would be one of the biggest transactions this year for a company that already held the crown for the largest global offering of 2015.

There are many reasons why a smaller government role in the 146-year-old institution makes sense. Not least might be a better nose for deals. Better, anyway, than the disastrous acquisition of Toll Holdings Ltd. two years ago.

Japan Post group shares are relatively illiquid, as the three entities in the $12 billion IPO of November 2015 only sold 11 percent of the government's stock.  A smaller Ministry of Finance stake could be a welcome route to freedom -- government ownership below 50 percent would allow the company to move into areas like lending without prior approval.

It's not just lending that would benefit. Japan Post Bank Co. could start selling products to compete with the nation's aggressive regional banks, while reducing dependence on bond investments. Japan Post needs to find growth outside its core area: The mail business is in secular decline, but state ownership makes closing unprofitable branches difficult. 

In  April, after a massive writedown on Toll, Japan Post reported a loss for its first full financial year as a listed company. It was back in the black for the April-June quarter. Negative interest rates pose a challenge to growth, however, and that performance might not be sustainable. 

By law, the government must eventually cut its stake to one-third. The question is, why sell now, except to chip away at the government deficit? Japan Post's shares continue to trail the broad market, and the case for savings banks as investments is far from clear -- as Postal Savings Bank of China Co.'s underperformance since its record IPO last year shows.

Lumbering giants, even with a reduced government role, aren't known for nimble strategies. Japan Post's dividend yield has been flat.

Flattish
Japan Post's dividend yield hasn't moved much in recent months
Source: Bloomberg

When Japan Post went public, the sale was an attempt by Prime Minister Shinzo Abe not just to raise money for reconstruction after the 2011 Fukushima disaster, but also to change the Japanese attitude to stocks -- only about 10 percent of household wealth is in shares, compared with as much as 50 percent in the U.S. (About 80 percent of the offering ended up with individuals. The Ministry of Finance still holds some 80 percent of Japan Post.)

These new investors won't be clamoring for more stock from the market, even if the sale improves long-term growth prospects. This is a case where a delayed delivery would be welcome.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net