Postal savings in Japan and mortgage markets in the U.S

Financial system redesign has become high political drama in Japan. In August, 2005, Prime Minister Koizumi's plan to privatize Japan's huge postal savings and life insurance system (PSS) was defeated in the Lower House of the Diet. Koizumi then retaliated by dissolving the Lower House and calling a \\"snap\\" election for September 11, 2005 in hopes of getting members of the Liberal Democratic Party (LDP) more supportive of his program into the legislature. This was essentially a showdown?an open confrontation between the \\"new\\" and the \\"old\\" LDP in an effort by Koizumi to reduce the role of government . In the end, Koizumi and the more liberal wing of the LDP were victorious, increasing their majority position from 54% to 67%, and on October 14, 2005, Koizumi's privatization proposal became law with only minor changes. This victory has generated widespread optimism that serious structural reform will commence and that the Japanese economy has turned the corner after almost fifteen years of recession, deflation, and stagnation. ; Japan is not alone, however, in confronting issues related to a large government presence in the financial system. For example, Greenspan (2004) as Fed Chairman testified about the potential for Fannie Mae and Freddie Mac, the two big government-sponsored mortgage institutions, to generate systemic risk in the U.S. financial system. ; This Letter puts the recent events in Japan in context, describes the Koizumi proposal enacted in October, and discusses the PSS and Fannie Mae and Freddie Mac (hereafter Fannie and Freddie).