Deregulation and privatization in the Japanese financial sector and its effects on competition

Abstract

In this thesis I am studying the institutional reforms that have been made in the Japanese financial system, from the beginning of the 80s but mostly between the years 1990-2000, and the privatization of the Japan Post, started in 2007. In the highly regulated Japanese financial system, the government divided the banks and other financial institutions into functional and regional categories such as city banks, regional banks, long-term credit banks, and securities companies etc, and restricted entry of companies of another category. Government banks also competed with private banks. Deposit rates were fixed according to government regulations. The government was giving banks protection and did not allow any bank to go bankrupt. The background of how the financial system regulations have changed is how the economy has developed in Japan during the years. Especially the financial crises of the 90s accelerated the reforms. The Postal Saving Bank (PSS) within the Japan Post is a government owned bank that offer deposit services to the Japanese public. The deposit balance of the Postal Savings was in 2004 equal to the deposits at Japan’s four largest private banks together. The PSS used its funds to put into a government program called Fiscal Investment and Loan Program, FILP, where it is used to finance different government investment. Because of the PSS being of such large size compared to the privatized banks, the privatization has raised fears that it would dominate the market after becoming private and therefore hurt competition and private banks. My purpose with the study was to describe the Japanese financial system and how deregulation of the financial sector and privatization of the PSS affected competition on the bank market. My main question was how institutional reform in the form of deregulation and privatization has given/will give a more competitive bank market? This was divided into three questions to easier be able to find an answer on the main question. Q1: Has the deregulations of the financial sector given a more competitive bank market? Q2: Will the privatization of the PSS give a more competitive bank market? Q3: Is the FILP system compatible with free competition on the bank market? The findings show that competition increased on the bank market since the government removed all functional and regional barriers on the market, removing artificial barriers of entry for financial companies. The fact that lending margins has decreased after the deregulations is one sign of increased competition. For the privatization of the PSS the pattern is mostly the same. The privatization will mean the abolition of subsidies from the government to the PSS. The large size of the PSS is mainly because of very generous terms on its products which are likely only possible because of government subsidies. After a privatization the deposits at the PSS could be expected to fall making the competition more equal. Also the banks situation is improving. For the FILP, reforms have made it less problematic for competition but the problem of government banks competing with private banks still remain.