Japan Post chief faces hard sell By any standard, Japan Post Group is enormous. The mail-to-insurance conglomerate has about 24,000 branches and 430,000 employees. Customer deposits of Y176tn ($1.77tn) make it bigger than any bank in the world, outside China. But big is not necessarily beautiful. And that is where Taizo Nishimuro comes in. In June the former president of Toshiba and the Tokyo Stock Exchange was given the job of turning this state-owned behemoth - where revenues dropped in every segment last year, and where net profits are expected to fall more than 60 per cent this year - into an attractive investment. If the government can sell a majority stake in the main holding company by mid-2015, as planned, it could amount to the biggest privatisation in history. A cabinet estimate in January put potential proceeds at Y4tn ($41bn) - eclipsing the world-record $22.1bn raised by Agricultural Bank of China in its 2010 debut, according to Dealogic. Japan Post is so far keeping quiet on its strategy to build relations with potential buyers of the stock, both inside and outside the country. But bankers expect significant chunks to end up in non-Japanese hands. Overseas institutions are "very important potential investors," says one senior Japan Post executive. An initial public offering would be the end of a very long road. In the early 2000s, former prime minister Junichiro Koizumi began pushing for a break-up of the postal system, eventually splitting Japan Post into four operating units in 2007 as a prelude to a sale. But momentum was lost under the government that took power two years later. If Shinzo Abe can pull off an exit this time, says Mr Nishimuro, it should serve as a set piece for "Abenomics," showing that the returning prime minister is serious about the radical reforms he promised before lower-house elections last December, and again this summer in winning control of the upper house. "Political stabilisation was always an essential part of the plan," says 77-year-old Mr Nishimuro, in an interview with the Financial Times in Japan Post's cavernous headquarters just across the road from the finance ministry. "Freeing up this huge organisation is one way of showing the potential of the "third arrow"" of structural reform, he says. Handing control to the private sector will also score points with Washington, which has long argued that state ownership has made it hard for US firms to compete in the country's insurance market. Japan Post Insurance's 37m policies in force accounted for about three-quarters of the group's total sales of Y15.8tn last year. On a visit to Tokyo in August, US trade representative Michael Froman singled out autos and insurance as two Japanese industries in which "barriers to access . . . hurt workers, businesses and consumers in both our countries." Now that Japan has joined the US in negotiations over the Trans-Pacific Partnership trade bloc, setting a timetable for an IPO - and sticking to it - is vital, say advisers to the government. Quarterly results, published for the first time in August, were a step in the right direction for Japan Post. The group recorded a solid Y162bn net profit for the three months to June, well on the way to the target of Y350bn for the fiscal year to April, boosted mostly by cost cuts. But whipping up broad interest among investors will not be easy. As long as more than half of its shares are held by the government, Japan Post is subject to caps of Y10m per person on bank deposits, and Y13m on insurance policies. Meanwhile, it is shut out of faster-growing markets such as mortgages. In September last year Japan Post applied for permission to offer home loans and corporate loans directly, but was turned down by the regulator. The powerful Japanese Bankers" Association lobby group said such a move would distort fair competition. Is the new cabinet sympathetic to Japan Post's "Catch 22" - needing higher profits to list and a listing to boost its profits? "Yes, but they are sympathetic to anybody - to the commercial banks, and also to all those insurance companies," says Mr Nishimuro, with a smile. That means it has to find ways to squeeze growth from existing resources. Its president has begun by hooking up with rivals not subject to caps. In July Japan Post said it would partner with Ohio-based Aflac to sell cancer insurance. Negotiations are under way for similar distribution deals. "We have a post office network all over Japan, [but] we have not utilised this to the full," he says, noting that just one in 20 branches currently offers general insurance. Pushing more mutual funds, where caps do not apply, is another way to higher profits. Japan Post says sales of investment trusts almost doubled in the first half of the year as customers shifted cash from deposits to capture the stock market revival caused by the weaker yen. Mr Nishimuro will focus on exports, too. Japan Post is already licensing its mail-sorting technology to the national postal service of Serbia, and is eyeing similar deals in Singapore and Myanmar. Whatever the product, he says, "we need to keep demonstrating our selling potential." Hands are tied Japan Post has long been a precious resource for the world's most indebted government. Holding Y195tn ($2tn) in Japanese government bonds at the end of March, the group is the biggest single prop for the Y750tn market - bigger even than the Bank of Japan, with its Y158tn in holdings. But that is putting Taizo Nishimuro in a bind. Like many other executives presiding over vast, JGB-heavy portfolios, the president would like to dabble in higher-yielding assets such as corporate bonds and loans. Diversification, after all, has been encouraged by Prime Minister Shinzo Abe and by the new administration at the BoJ, which sees such "portfolio rebalancing" as a way of vaulting Japan out of years of deflation. But not for Japan Post. As long as its shares are 100 per cent owned by the finance ministry, its hands are tied. Take Japan Post Insurance, with 62 per cent of its Y90tn assets in JGBs. While rival insurers are building portfolios of stocks and overseas bonds, as the BoJ has asked them to, there is "little prospect" of JPI significantly increasing its risk assets, says Masatoshi Kikuchi, strategist at Mizuho Securities. The same applies to Japan Post Bank, which does not even have the luxury of churning its Y139tn of JGBs in search of trading income. In March last year, according to the annual report, the bank's trading portfolio stood at a minuscule Y216m. Once control of Japan Post passes to the private sector, reducing JGB exposures is "a possibility," says Mr Nishimuro. A former chairman of the Fiscal System Council, advising the government on ways to curb spending, he says he is "very concerned" about Japan's ever-rising debt pile, now equivalent to 17 years of tax receipts. But for now, he stresses, "we have no intention to sell." Until the initial public offering, Japan Post is "kind of trapped."