Forget the Medibank Private Float: Why You Should Keep Your Eye on the Japan Post IPO

Let’s pay a visit to Japan. I’m sure you’ve read how Japan is in recession again. But what you may not have seen — and what I found more interesting — was the news last week on US investment firm Blackstone. The company just paid General Electric $US1.6 billion for their Japanese residential real estate business.

What? Wait a moment. Isn’t Japan a demographic wasteland of geriatrics with an insatiable demand for adult nappies and Zimmer frames? Not only that, are they not forever teetering on the edge of a government debt collapse because of their 220% debt-to-GDP ratio? Well, maybe it’s not quite as bad as all that after all. Blackstone are shrewdly buying up real estate all over the world.

Here’s what the Wall Street Journal had to say about the deal:

A big decline in the yen over the past two years has made Japan more attractive to international investors, who are moving beyond office and retail spaces in central Tokyo as prices keep rising…the biggest cities are seeing inflows of people even as the nation’s total population declines.

That seems reasonable enough. But it’s the Japanese government debt that people worry about. But about 95% of that debt is held domestically. For now, that puts the Japanese government in a much stronger position than you might realise, as it doesn’t rely on foreign creditors.

It helps when you have captive buyers too. For the Japanese government, that’s the central bank, the Bank of Japan, which everybody knows about already. But there’s also Japan Post Holdings, which not many people pay attention to. Japan Post is one of the biggest banks in the world thanks to its enormous deposit base of Japanese savers. Currently, Japan’s Ministry of Finance, a government agency, owns it.

There has been a long running power struggle within the Japanese government over who should control Japan Post. I don’t pretend to understand most of it. What I do know is that Japan Post also holds about a fifth of Japanese government outstanding debt.

It’s also why the Initial Public Offering (IPO) of Japan Post will be something to watch in 2015. When it floats next year, it will be one of the biggest privatisations of all time. It’s so big it may take until 2023 to sell the whole thing off. The sale will raise around US$37 billion, according to Bloomberg. To put that in perspective, Medibank Private was AUD$5.9 billion float.

The Financial Times reported on the Japan Post IPO last month with this comment:

Plans to privatise the insurance-to-banking conglomerate – with 20,000 branches and about 400,000 employees – had foundered under previous administrations, but bankers said that a successful deal this time could bolster the reformist credentials of the prime minister, Shinzo Abe.

I have to say, the phrase ‘reformist credentials’ when it comes to banking make Abe sound like a stooge of the World Bank and IMF…which he may very well be.

Once Japan Post is privatised, or maybe even before, I’m betting it will move away from low yielding Japanese government debt and lobby to enter the mortgage market, from which it is currently prohibited. As those government bond assets fall into international hands too, it will open up a small crack in Japan’s financial fortress.

Callum Newman+
For Markets and Money

Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect.

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