Japan’s Postal ‘Bank’ Called Economic Drag : Money: A massive shift of public savings into post office accounts has bankers worried that the country’s financial system is being undermined.

When she was about 8 years old, Rie Watanabe’s mother took her to the local post office to open her first passbook savings account. Now 21 and a professional draftsman, she still parks most of her $3,000 in savings there.

“It’s convenient, and the interest rates are higher than at banks,” Watanabe explains as she leaves the tiny neighborhood post office.

Watanabe is one of more than 70 million Japanese who use the 23,600 post offices around the country as their local savings bank. Some of these accounts, which charge no fees, may contain as little as 10 yen (8 cents). Together, however, the deposits add up to a mind-boggling $1.3 trillion and, in effect, make Japan’s postal system the world’s largest bank.

This government-controlled “bank” is one of the secrets of Japan’s postwar rise as an economic power and is today a key weapon in the government’s efforts to shore up a sagging economy. Officially, the funds, pooled with public pension and trust money, support the Finance Ministry’s Fiscal Investment and Loan Program (FILP).

FILP’s purpose is to further “national interest.” Through the years it has been used to help build Japan’s most important industries, but it has taken on a more urgent role in the current economic downturn.

In December, for example, when the Finance Ministry pushed through parliament an $86-billion stimulus package including low-interest loans for road construction, housing and small businesses, the bulk of that money came from FILP, currently a $2.3-trillion fund including about $1 trillion in pension and trust funds.

To Japan’s bureaucrats, the FILP funds provide the government with a critical tool for promoting public policy goals. “We make long-term loans at low interests for public projects,” says Toshiyuki Oto, an official of the Financial Bureau of the Finance Ministry, which is charged with managing FILP. “These are loans that the private sector can’t make and it wouldn’t be appropriate for them to make.”

Indeed, FILP is known as the government’s “second budget,” investing each year an amount larger than the official government budget. In the fiscal year that begins April 1, this “second budget” will amount to $368 billion, a 12% increase over last year. A large portion of the money, for example, will be given to public policy organizations, such as the Japan Development Bank, to be doled out to small businesses that might otherwise have difficulty borrowing money to invest in automation equipment.

Japanese bankers, however, see FILP as a growing menace that has put a drag on the economy and threatens to undermine the financial system. In 1991, as the public grew increasingly concerned about the security of deposits in banks, and as deregulation of bank deposits made interest rates on postal savings accounts competitive, there was a massive shifting of savings into the post office system.

Japanese households deposited $94 billion in postal savings accounts in the fiscal year that ended March 31, 1992. That sum represented more than 50% of all new household savings, says Hirohiko Okumura, director of research at Nomura Research Institute. Okumura says his calculations show that only half the money was actually invested through FILP in a way that channeled the money back into the private economy. “If they can’t use the money, they shouldn’t take the deposits,” says Okumura.

The trend has continued. In December, when employees deposited a larger-than-usual portion of their winter bonuses in savings accounts, postal savings deposits grew by $18.5 billion while long-term bank deposits rose by $6.6 billion.

S. G. Warburg economist Jesper Koll says the trend of the post office sucking up savings has contributed to the shrinking of Japan’s money supply and may have helped to push Japan into recession.

When a bank gets a deposit, it is allowed to make loans in amounts of about five times the value of the deposits. This has what economists call the “multiplier effect” of making more money available for economic growth. FILP, however, is allowed to lend no more than what it takes in--which erases the multiplier effect, says Koll. The effect is less availability of money to fuel economic growth.

Still, because of its sheer size, a FILP decision can have an enormous impact on the economy. The Finance Ministry last month bought nearly $800 million in long-term government bonds with FILP funds, choosing to bid on the open market for the bonds rather than deal directly with the Bank of Japan. The move, which will be repeated each month for the near future, pushed long-term interest rates down a couple of notches and further pressured the Bank of Japan to lower its discount rate--which it did, by 0.75 points, last week.

Atsushi Miyawaki, senior economist at Japan Research Institute, says another problem is the Finance Ministry using FILP funds to minimize budget deficits.

Since 1990, the ministry has sought to limit increases in government spending by refusing to issue new government bonds. But with the economy in a slump and tax revenues falling, the Finance Ministry has been forced to cover its budget deficits by drawing from the FILP program. This kind of “hidden” deficit financing, Miyawaki says, has the effect of understating Japan’s $1.4-trillion national debt by about $300 billion.

The growth of FILP is also a problem because the postal system actually pays depositors more in savings interest than the Finance Ministry charges borrowers. In effect, the more FILP money the government lends, the more money the government loses. “FILP was important during our high-growth phase,” says Miyawaki. “Now it is just creating more problems.”

Bankers also express concerns that a larger and larger portion of the financial system is being taken over by the public sector, thereby turning Japan into a quasi-socialist economy.

“You have to ask whether it is more efficient for the government to take deposits and lend, or whether it is more efficient for the private sector,” says Kenji Mizutani, chief economist at Tokai Bank. “In the short term (FILP) might be good for the economy, but in the long term it’s undesirable.” Tsuneo Wakai, chairman of the Federation of Bankers Assns. of Japan, says the post office system competes unfairly with banks because of its tax-free status and government backing. The loss of deposits to the post office, bankers say, will prolong the time banks will need to recover from bad loans tied to real estate investments.

Those who would like to rein in the FILP recently won a major battle. Beginning in June, postal savings accounts will be tied to market rates, so they will be less competitive with bank accounts. And, following the recent central bank discount rate cut, interest on postal savings accounts was reduced more than interest on bank deposits, in an effort to make postal accounts less attractive.

Postal savings accounts will continue to have advantages, however. Money invested in 10-year fixed deposits at attractive rates, for example, can be withdrawn after six months without penalty.

For all the complaints about the postal system, however, many bankers admit that their wives deposit the family savings in postal accounts. And economists acknowledge that, on balance, FILP is more of a help than an economic hindrance now, since private investment has come to a virtual standstill.

This year, with consumer spending flat and businesses struggling, most of Japan’s economic growth could end up coming from public-sector spending, primarily of money from FILP.