Japan will soon say how it plans to privatise its postal service, Prime Minister Junichiro Koizumi's biggest and most controversial economic reform project to date and one that many say could be heading for a messy compromise.
Koizumi has staked his reform credentials on changing the 133-year-old postal system, which includes a savings bank and an insurance arm with combined assets of 400 trillion yen ($3.6 trillion) - a quarter of all Japanese household assets - as well as a mail service.
But faced with concern in financial markets, fierce political opposition from within the ruling party, a powerful postal workers lobby and indifference among voters, analysts say the reform may end up much less far-reaching than envisioned.
"There are many conflicting interests involved but also a complete lack of leadership, so debate has been going around in circles," said Masaaki Kanno, chief economist at J.P. Morgan.
"At this rate, any attempt at reforming the system may end up being watered down," he said.
The government aims to outline its plans by the end of September and to privatise Japan Post from April 2007. After a transition period, full privatisation will be completed by 2017.
So far though details have been sketchy, with a government advisory body agreeing mainly on a general outline that will see the entity operating its banking, insurance, mail and counter services separately under a holding company.
The lack of specifics has raised concern the plan could end in the sort of political compromise that marked the earlier much-touted reform of the debt-laden state highways body. That entity was also split up, but was allowed to keep its plans for massive spending on largely unwanted roads.
One of the biggest questions over posts reform is how far the government will go to change an institution that helps finance Japan's fiscal deficit through its holdings of some 140 trillion yen in government bonds, a quarter of all outstanding issues.
The possibility that a privatised posts service will sell bonds for better-yielding assets has alarmed bond markets and officials, including Finance Minister Sadakazu Tanigaki, himself part of the advisory team discussing postal reform.
"The government will have to tread very carefully with privatisation because of the big impact it could have on the bond market and on the sustainability of the system itself," said Mitsuru Yoshikawa, head of capital markets research at Daiwa Research Institute.
BLOCKING REFORM: Critics of the postal system, including Koizumi, have long seen it as a major roadblock to financial sector reform. In a demonstration of his intent, Koizumi plans to create a posts privatisation minister in a cabinet reshuffle likely next month.
The job will probably go to Economics Minister Heizo Takenaka, the architect of much of the government's reform drive and the man who oversaw a tough recovery plan for Japan's banks.
He has visited Germany to look at progress in the privatisation of Deutsche Post, which Japan is using as a model for its own efforts.
"(Privatisation) is important because the postal operation has been distortionary for the economy," said Robert Feldman, chief economist at Morgan Stanley.
"It has introduced distortions in the financial sector in fund gathering and fund allocation," he said.
The bulk of the funds it manages was until three years ago used by the Finance Ministry to help loss-making state entities.
"Ideally, reforms would see the postal system's banking and insurance operations cut down their assets so that money now being channelled to the public sector can find its way to the private sector," said Kosuke Shiraishi, senior economist at Mitsubishi Research Institute.
"But the reforms might only make the system bigger and not do much to change money flows," he said.
Banks and insurers have complained that the system enjoys an unfair advantage because it pays no taxes and receives state guarantees on its products, allowing it to set higher rates.
The advisers have said a privatised postal system would be allowed to offer the same services as banks and insurers, a proposal that could hurt a sector already suffering from slim lending margins and low fee incomes.
Another worry is the mail service, highly reliable but which until last year had spent over a decade in the red.
While tie-ups with convenience stores and ambitions to launch a pan-Asian parcel delivery service sound promising, analysts say the need to maintain the system's social role of serving rural households may make it difficult to maintain profits.
"Finding a viable business plan for the mail service may be difficult, especially because it is clearly falling behind competition with private-sector counterparts," said Mitsubishi Research's Shiraishi.
Scaling back the system's 24,700-branch network is also highly contentious because the 280,000 postal workers - three out of every 10 state employees - are a powerful support base for Koizumi's Liberal Democratic Party.