Buying into Australia.

Photographer: Kiyoshi Ota

Japan's Central Bank Told the Check's in the Mail

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For a decade, beginning in the early 2000s, Japan Post, an enormous state-owned company with some 400,000 employees and 25,000 branches,  embodied the bloat, corruption and complacency that undercut every effort to reform Japan's economy.

The real stumbling block was the world's largest savings institution at the core of the mail-delivery system. With trillions of dollars in assets, it was the piggy bank that politicians used to fund pet projects in home districts: dams, white-elephant stadiums, bullet trains to nowhere. Japan Post helped fuel the concrete-economics ethos that led to today's unsustainable load of public debt.

In 2001, a new prime minister finally moved to privatize Japan Post. Over five years, Junichiro Koizumi methodically wore down the opposition and pulled off modern Japan's greatest structural change. Now, that perseverance is paying off in ways that may even help the Bank of Japan end deflation.

This year, Japan Post plans an initial public offering, and before that happens, the chief executive, Toru Takahashi, is making some bold bets on expansion. The company is buying Australia's Toll Holdings for $5.1 billion, for example, to gain a transport network in faster-growing Asian markets. To execute the deal, and others to come, Japan Post will sell huge blocks of government bonds (it holds about $1.3 trillion worth).

Those sales dovetail with plans by the $1.1 trillion Government Pension Investment Fund to reduce its public debt holdings by about half. In short, the two biggest holders of sovereign debt are simultaneously dumping bonds that BOJ Governor Haruhiko Kuroda can scoop up to turbocharge his efforts to boost a flagging economy.

Caveats abound, of course. As 22 months of unprecedented BOJ liquidity prove, a self-sustaining recovery requires more than easy money. The odds of success would improve exponentially if Prime Minister Shinzo Abe, Koizumi's protégé, would make good on his pro-growth deregulation pledges. Also, nudging the government pension "whale," as traders call it, to buy more Japanese stocks isn't a reform -- it's a Band-Aid. A risky one, too, that could roil the $5.2 trillion bond market and lead to heavy pension losses if stocks plunge.

For Kuroda, however, huge blocks of bonds returning to the secondary market is an opportunity to get greater traction. The yen's 20 percent drop in two years has dented household spending. Even Abe's economy minister, Akira Amari, says further declines would be out of line with fundamentals. Amid such worries, at a Feb. 18 policy meeting, the BOJ held its fire, sticking with pledges to boost the monetary base at an annual pace of $670 billion.

That means Kuroda's next monetary maneuvers will be behind the scenes. Chief among them: nationalizing more public debt. To meet its 2 percent inflation, the BOJ is cornering the market. It already buys about $102 billion worth of government bonds each month, more than 90 percent of the amount offered to investors. Japan Post and the government pension fund are allowing the BOJ to add to its shopping cart to boost lending and borrowing activity.

Japan Post's foray overseas is important in other ways, too. Some big Japanese companies aren't waiting for Abe, but are moving ahead on their own to make the economy more vibrant. In that regard, Takahashi's mergers-and-acquisitions push deserves its own mention. This deal and others, he said, “will create a truly global company, and we have plans for significant further investment and growth.”

The world's third-biggest economy needs more of this thinking. Japan Post's journey from cautionary tale to growth creator is also a timely reminder for Abe. Big, bold reforms in Tokyo are hard to achieve and take years to gain traction. As Koizumi demonstrated, however, they're well worth the effort.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Willie Pesek at wpesek@bloomberg.net

To contact the editor on this story:
Mary Duenwald at mduenwald@bloomberg.net