Preliminary Thoughts On Japan Post

Japan is moving toward its largest privatization in two decades. It is selling Japan Post. It will consist of a holding company, a bank, and an insurance company. It will likely raise the equivalent of $10-$12 bln.  

There will be 495 mln shares of the holding company that will be sold, 412 mln shares of the bank and 66 mln shares of the insurer. Domestic investors will take 80% of the initial public offering, and the remaining 20% is earmarked for overseas investors.  

Of the domestic buyers, 95% is for retail. The final price of the IPOs will be set on October 19. They will be listed as of November 4 and begin trading November 8. 

The impact on the yen is likely to be modest, in part because foreign investors might shift funds from other Japanese equity investments. Foreign investors have been been persistent sellers of Japanese shares for the past 17 weeks, with three exceptions. During this selling spree, foreign investors have divested JPY5.29 trillion (~$44.2 bln) of Japanese equities

Japan Post is a behemoth. It has 24k branches and 200k employees. It has JPY296 trillion (~$2.5 trillion) assets under management. It is a poor return on equity compared with Japan’s megabanks. Part of this is a function of its investment allocation. A little over half of its assets are in Japanese government bonds compared with an 11% average at the megabanks.   

The speculation is that when the bank and insurance company are spun off, and the holding company gradually reduces its stake in both entities toward 50% (from almost 90% after the IPOs), the assets will be diversified into equities and foreign markets. Then the returns may compare more favorably with the Japan’s other large banks. 

There is some skepticism in some quarter about the long-term prospects. The rise of e-mail and instant messaging may erode the return post mail. The prospects for insurers may be limited by the aging and shrinking population. It is not clear if the new Post Bank will be able to lend for mortgages. The concern is that it will take some time to change the investment structure and growth opportunities appear limited.