The Public Financial System in Japan - Re-verification of the ballooning theory and the privileged government enterprise theory

The large weight of public financial institutions is often identified as one of the characteristics of the Japanese financial system. It is believed that reform of the private financial sector is not enough to revitalize the Japanese financial system, but reform of the public financial sector is crucial. There are various opinions concerning ideal public financial institutions, and heated debate continues. We would like to raise attention to the point that much discourse is based on the prerequisite that public financial sector is still increasing (i.e., the ballooning theory). However, only a small number of arguments present grounds for the prerequisite, and even in the case of those based on statistical analyses, such analyses are not rigorously verified. Under these circumstances, the first purpose of this paper is to reverify the ballooning theory of public financial sector which is used as a prerequisite for much of the discourse. Of course, although the ballooning theory may be overstated, private financial institutions cries for help strongly suggest that they are being squeezed by public institutions. The reason why public financial institutions that should be tightly regulated have such great power and oppress the private sector, which has been significantly deregulated in recent years, is often thought to be because so many privileges are given to public financial institutions as government enterprises (the privileged government enterprise theory). We agree that government enterprises have privileges, but if these are small, it is difficult to say that they are the main cause of the competitive dominance of government enterprises. The size of the privileges must be quantified to assess the privileged government enterprise theory. This is the second purpose of this paper. The following are the major conclusions of this paper. Concerning the public financial sector ballooning theory, various indexes prove that public financial activities had increased in share by around 1998, so from this aspect the ballooning theory is correct. However, this situation changed and since 1998 public financialactivities have either remained at the same level or have tended to decline. Further attention should be paid to the fact that when examining the relative size of public financial activities, the result varies significantly depending on how the area of interest is set. For instance, if finance is viewed as a risk bearing mechanism rather than a flow of funds, public involvement in finance in the U.S. may be greater than in Japan. Concerning the privileged government enterprise theory, it is true that Japan Post has privileges (e.g., the exemption of taxes as current expenses), but the estimate of 4.6 trillion over ten years by the Japanese Bankers Association is considered to be excessive. It may be judged that most of the privileges of the government enterprise have been eliminated during the establishment process of Japan Post and the conditions of government enterprise for competition are almost equalized with the private sector, On the other hand, government enterprise may become unable to bear the burden caused by restrictions imposed on them any longer (particularly the obligation of maintaining offices in remote areas), so how Japan Post can bear the burden must be considered. This paper is organized as follows. Section II examines the ballooning of the public financial sector, which is treated as the starting point of the debate concerning the reform of public financial system in Japan. Section III reverifies the privileges enjoyed by government enterprises. Section IV presents the conclusions of this paper.