Postal Reform and the Fiscal Investment and Loan Program: Toward Democratic Control of Government Finances (2)
July 7, 2010
Because of the major role Japan's postal savings program has played in financing government programs, the postal reform bill submitted to the Diet by the Hatoyama cabinet raises important issues of fiscal democracy and accountability. The second article in this three-part series discusses the 2000 reforms of the Fiscal Investment and Loan Program and the effect of postal privatization.
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Although FILP has come under frequent criticism in recent years, it played a key role after World War II in the development of social infrastructure essential to Japan's economic development by financing the construction of national expressways and airports, promoting housing construction, subsidizing social welfare facilities, and supporting local public works projects. With the end of the rapid growth era, however, FILP's function and character began to change. During the post-bubble recession of the 1990s, the government relied on FILP spending to stimulate the economy. By 1996, annual lending under the Fiscal Loan and Investment Plan had reached a peak of 40.5 trillion yen, and by the end of fiscal year 2000 the program's assets totaled 417.8 trillion yen. At a time when General Account spending was under harsh constraints, FILP assumed much of the burden.
FILP under Fire
Since the basic source of FILP funds was postal savings and other interest-paying deposits, FILP was required as a rule to invest in programs or projects that promised a certain minimum return. But in some cases the government used a combination of direct spending and FILP loans to fund quasi-governmental corporations set up to administer programs that, while not profitable, meshed with policy objectives. An example is the interest subsidies paid to the old Housing Loan Corporation, which provided low-interest home loans to the public.
As FILP grew in scale and boosted its lending to such public corporations, those "FILP agencies" came under increasing attack for inefficiency and wasteful spending.
Strictly speaking, the agencies' management problems were separate policy issues, not a FILP issue per se. But the climate in which FILP functioned had changed dramatically over the years. The system may have functioned fairly efficiently at a time when demand exceeded supply and funds had to be lent selectively. But once supply began to exceed demand, it was all too easy to lend the funds indiscriminately and inefficiently, without regard to priorities.
The problems surrounding the agencies through which FILP funding was channeled became a major impetus for reform of the FILP system. The Administrative Reform Council, chaired by the late Prime Minister Ryutaro Hashimoto, recommended "fundamental reform of the Fiscal Investment and Loan Program" in its final report (December 13 1997). Reforms were also deliberated within the Ministry of Finance, which administered the program. The report released by MOF's advisory council (November 27, 1997) enumerated FILP's problems, noting that its ballooning scale and ever-expanding fund encouraged wasteful loans, that its escalating investment in short-term assets and Japanese government bonds was creating distortions in the financial market, that its long-term fixed lending rates were incompatible with market principles, and that evaluation of the programs it financed was lax.
Reform was finally accomplished with the enactment of the relevant legislation in May 2000. The law put an end to the compulsory deposit of postal savings and pension reserves in the MOF Trust Fund Bureau and required that FILP raise funds, on an as-needed basis, by floating "FILP bonds" (essentially Japanese government bonds) on the market. The new system was designed to ensure that demand drove the supply of funds (raised via the capital markets) instead of letting the supply of funds (from sources like postal savings) determine lending. The postal savings, Kampo, and pension funds were to be managed independently via the financial market by investing them in FILP bonds and FILP agency bonds (issued by public corporations, etc.) on the basis of portfolio considerations. This severed the direct flow of funds between the postal savings programs and government agencies via FILP. As a consequence of these reforms, lending under the FILP Plan dropped by 63% between fiscal 1996 and 2006, from 40.5 trillion yen to 15.0 trillion yen.
The Diet's Role and Postal Privatization
Under the new system, an exception was made for loans to local governments, which are often hard-pressed to raise adequate funds through local taxes. This allowed the independently managed postal savings and Kampo funds to provide direct financing to local governments within the frameworks of the Local Government Bond Plan and the FILP Plan. However, the amounts were to be determined not through separate negotiations with local governments but on the basis of allocations approved by the Diet through the budget process, and the loans were to have uniform terms set by the government in keeping with market principles. In this way, FILP funding as a fiscal tool remained subject to Diet approval via the budget process. Because lending to local governments functions as a tool of policy through allocation of resources, the annual FILP Plan was required to disclose all such lending, including loans from the postal savings and Kampo funds, in a consistent tabular format. The fiscal 2006 FILP Plan, for example, includes 170 billion yen from the postal savings fund and 310 billion yen from the Kampo fund among its disbursements to local governments.
With these changes, FILP reform was basically complete. But reform of the postal savings and life insurance systems continued. Japan Post was established as a special public corporation in April 2003, and the cabinet of Prime Minister Junichiro Koizumi forged ahead with his plans for postal privatization. The project hit a temporary setback when the House of Councillors rejected the government's privatization bills in June 2005, but Koizumi called an election of the House of Representatives over the issue, and in October 2005 the privatization bills were finally passed in a special session of the Diet.
Under the privatization plan, Japan Post was reborn as a joint-stock company, Japan Post Group, in October 2007, and the rules requiring Diet approval for loans from the postal savings and Kampo funds to local governments were scrapped. From fiscal 2007 on, resources from the postal savings and Kampo funds were no longer itemized in the FILP Plan; instead, loans from those funds to local governments were treated the same as financing from private banks.