Neither Snow, nor Rain, nor Heat…Japan Post Goes Private

Japan is moving toward its biggest privatization in two decades.  It is promoting Japan Post.  It will consist of a holding company, the bank, and an insurance company.  It will likely raise the equivalent of $10-$12 bln. 

There is going to be 495 mln shares of the holding organization that will be sold, 412 mln shares of the bank and 66 mln shares of the insurer.  Domestic investors will take 80% of the initial public offering, and also the remaining 20% is earmarked with regard to overseas investors. 

Of the household buyers, 95% is for retail.  The final price of the IPOs will be set on October 19.  They will be listed as of November 4 and begin trading November 8.

The impact on the yen is likely to be moderate, in part because foreign traders might shift funds using their company Japanese equity investments.  International investors have been been persistent sellers of Japanese gives for the past 17 weeks, along with three exceptions.   During this selling spree, foreign investors have divested JPY5.29 trillion (~$44.2 bln) of Japanese equities

Japan Post is a giant.  It has 24k branches and 200k employees.  It has JPY296 trillion (~$2.5 trillion) assets under management.  It is a poor return on equity compared with Japan's megabanks.  Part of this is really a function of its investment allocation.  A little over half of it’s assets are in Japanese federal government bonds compared with an 11% average at the megabanks.  

The speculation is that when the financial institution and insurance company are spun off, and the holding company gradually reduces its stake in both entities toward 50% (from almost 90% after the IPOs), the assets will be diversified into stocks and foreign markets.  Then the returns may compare much more favorably with the Japan's additional large banks.

There is some skepticism in some quarter about the long-term potential customers.  The rise of e-mail and im may erode the come back post mail.  The prospects for insurers may be limited by the aging and shrinking populace.  It is not clear if the new Post Bank will be able to give for mortgages.  The problem is that it will take some time to change the investment structure and growth opportunities appear limited.

The Nikkei rallied nearly 27% in the January lows through the full of late-June.  The high was retested within August.  From that July high to the end of September low, the Nikkei dropped about 19.3%.  The 9% rally this month is is fizzling away.  The gap lower opening today signals a deterioration in the technical condition.  Today's decrease retraced a little more than 38.2% of the latest leg up.  The 50% retracement is near 17670.   There is a gap on the weekly charts created by the larger opening on October 5.  That gap has been entered, but the bottom of it is near 17776.

The dollar continues to trade in narrow ranges against the yen that have prevailed since late-August/early-September.  The triangle pattern no longer looks valid, but the range event persists.  The lower end from the range is near JPY118.60.  Recently, the dollar has been capped ahead of JPY120.50.   The actual euro is approaching having a four-month downtrend that is found near JPY137.Fifty today, falling by about 5 ticks a day.

Preliminary Thoughts on Japan Post is republished along with permission from Marc to Market