Japan Post finally faces deep structural reforms

HOW CAN national postal services survive after privatisation, deprived of government support? That is a question facing many countries’ operators, including that of Japan, which the government has privatised and is slowly selling off until it owns just a third by 2022. The process has trundled along slowly since being forced through parliament in 2005 by Junichiro Koizumi, the then-prime minister.

All post offices must contend with drastic declines in letter-writing. In Japan the population is shrinking to boot. Nonetheless, Japan Post is obliged to keep its full network of 24,000 outlets, greater even than the number of elementary schools or convenience stores. Many post offices are in rural and hard-to-reach corners of the archipelago, serving as hubs for ageing local communities.

Japan Post is owned by a listed umbrella company, Japan Post Holdings, whose shares have gone nowhere for years, and which owns two other subsidiaries, Japan Post Bank and Japan Post Insurance. The environment for them is tough too, owing to negative interest rates imposed as part of the Bank of Japan’s quantitative easing programme, and restrictions designed to stop them competing unfairly with private rivals, such as caps on the amount of deposits. Still, Japan Post Bank, the country’s second-biggest bank by deposits, provides most of Japan Post Holdings’ profits. The insurance company, Japan’s largest, is not doing badly either. But Japan Post needs to curb its dependence on both since under the privatisation plan Japan Post Holdings must sell off half the bank and the insurance unit over the next few years (it does at least keep the proceeds).

The post office’s response has several elements. It has moved into parcels and logistics, which is something its German counterpart, Deutsche Post, also did following privatisation. Japan’s parcel-delivery companies handle vast volumes because of expanding e-commerce, delivering around 4bn packages in 2017, up by 50% from 2000. Japan Post itself has increased its market share of such deliveries from 15% in 2016 to 20% this year. It possesses one big advantage over private firms such as Yamato, Japan’s leading delivery company, and Sagawa: owing to Japan’s extreme labour shortage (1.6 jobs exist for every applicant, the highest level for 44 years), parcel-delivery companies are having to cut service and raise prices to survive. Japan Post can instead transfer some of the thousands of people working in the declining mail business to the growing and more profitable parcels side.

Japan Post is also raising charges for mail delivery—and will follow suit with parcels as it wins market share. Japanese are used to impeccable, and therefore inefficient, levels of service. Masatsugu Nagato, president of Japan Post Holdings, says the postal service has to persuade people that they need to pay for it. “We used to say we have four things free in Japan—air, water, safety and good service,” he says. “We now need to charge properly for the last.” In 2017 he raised the cost of sending postcards from ¥52 (46 cents) to ¥62 in the first postal price rise for 23 years. Rates have risen for parcels from wholesale customers.

Such measures are helping. During the six months to September the postal arm of Japan Post Holdings turned its first ever profit, of ¥19.1bn. Yet few think that is enough to render it sustainable. “We need to go abroad,” says Mr Nagato. He is interested in acquiring companies in Asia and America. But finding the right target is hard. Japan Post has been chastened by its experience of paying too much (under Mr Nagato’s predecessor, Taizo Nishimuro) in 2015 for Toll, an Australian logistics firm that operates primarily around the Pacific Rim. That obliged Japan Post to make a write-down of ¥400bn in 2017, producing a ¥29bn loss for its first year as a listed company. Mr Nagato says before purchasing anything else he must “turn around” Toll.

He also wants to cut costs, a tall order as long as branch closures are ruled out. In November Japan Post started testing delivering light post by drone to help serve remote locations more cheaply. Mr Nagato is looking at the possibilities offered by self-driving cars. A more conventional cost-cutting measure is to ask the government if it can stop delivering on Saturdays, which would make a substantial difference. The communications ministry is likely to accede, since Japan Post Holdings has political clout despite Mr Koizumi’s assault on its privileges. The fourth postal service, so the joke goes, is a lobbying wing, an affiliate Japan Post gets to keep.