Tokyo returns to big privatisations

Written by The Financial Times | Updated: Sep 30 2011, 08:47am hrs
By Michiyo Nakamoto in Tokyo

The government in Tokyo plans to sell its entire stake in Japan Tobacco and other companies to raise Y2,000bn to fund reconstruction of the north-east region of Tohoku, devastated by the March earthquake.

The ruling Democratic party took the surprise decision, which would represent Japans biggest privatisation in years, to ease the tax burden on citizens. It would aim to reduce its 50 per cent stake in JT to a third within the next five years, according to Seiji Maehara, DPJ policy chief, with the remainder being sold within 10 years Following a string of large privatisations in the 1990s the sale of government shares has slowed in recent years, although this year the finance ministry sold Y223bn ($3bn) in NTT shares back to the telecoms operator.

Taxpayers had been asked to pay an additional Y11,200bn towards the estimated Y19,000bn cost of rebuilding Tohoku over five years. But opposition to the tax increase both from within the DPJ and the key opposition parties forced the government to search for other revenue sources.

The DPJ estimates that the privatisation plan, which requires approval from parliament, will reduce the extra tax burden to Y9,200bn.

Strong opposition to the original tax increase was partly due to concerns that the added burden would undermine consumption and further depress the economy. This shrank more than initially estimated in the three months to June, with gross domestic product falling 2.1 per cent on an annualised basis, compared with a projected 1.3 per cent.

If taxes are raised in this uncertain environment, there will definitely be an impact on the economy, said Masaaki Kanno, chief economist at JPMorgan in Tokyo.

The Japanese government, whose share of JT is worth an estimated Y1,700bn, also plans to sell its stakes in Inpex, an oil company, and Japex, an oil exploration and production group. Those stakes are worth a combined Y566bn.

The JT sale will be welcomed by international investors, who have long argued that the company should buy back its stock from the government to raise its earnings per share and boost its share price.

The Childrens Investment Fund, the activist fund, has written twice to the finance ministry urging the government to encourage the company to raise its dividend and buy back its shares.

Its in the public interest. This could be an example of [better corporate governance] and attract foreign investors back into Japan, said Oscar Veldhuijzen, TCI partner.

The government is likely to face opposition to its plan from politicians close to tobacco farmers. JT is required by law to buy the entire domestic tobacco crop, at significantly higher prices than in international markets.

Although there are only about 10,000 tobacco farmers, they have been able to wield significant influence over the debate on whether the government should sell its JT shares.

Before a final decision was reached there would be one or two more turbulent moments, Mr Kanno said.

The Financial Times Limited 2011