Even if Japan Post Bank lacks value as a bank, it might be able to create value as an investor. In fact, Japan Post Bank is aiming to secure stable investment returns by diversifying its assets under management as one of the largest institutional investors in Japan.
The difference between lending and investing is whether it is based on private relationships. In lending, a bank has to build a private relationship with the borrower to make information symmetrical. Establishing such a relationship requires time, but without it the bank would not be able to operate a loan business.
On the other hand, investment is done by picking targets from the public capital market, so investors are not required to to build private relationships with the entities they invest in. This means that if Japan Post Bank can align its human resources and establish a structure suited for asset management, it should be able to engage in sophisticated investment activities as an institutional investor.
Nevertheless, it would be extremely difficult to successfully invest in assets with fluctuating values when funded by deposits with principal guarantee. Japan Post Bank can only be feasible as an institutional investor if its deposits have a relatively long-term nature and are better described as savings compared to those of regular banks.
Theoretically, as long as Japan Post Bank can establish an advanced risk management system that suits the nature of its liabilities (and holds enough capital equity to absorb volatility in the value of its investments), it would be able to deliver added value as an institutional investor.
That said, the bank’s vast scale of over 200 trillion yen may become a restriction on its investment activities. Although appropriate scale depends on management capability and therefore cannot be simply defined, I feel that a comfortable level should be around 50 trillion yen.
According to its mid-term management plan, Japan Post Bank is aiming to increase its deposits by 3 trillion yen. It is hard to understand the rationale behind this target for scale expansion.
Another point is that while Japan Post Bank says it will diversify its investments, it has not changed the policy of putting government bonds at the center of its portfolio. Gathering deposits and investing in government bonds clearly does not create any additional value as an institutional investor. It should try to grow out of management centering on government bonds.