Q+A-What is Japan Post, why is it important?

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TOKYO, March 30 (Reuters) - Japan's government is divided over plans to scale back the privatisation of Japan Post, adding to Prime Minister Yukio Hatoyama's woes as his administration struggles in the polls ahead of a midyear election.

His cabinet was meeting late on Tuesday in an effort to reach a decision.

Dithering over the plan, which would have to be approved by parliament as well, could deal a blow to the Democratic Party-led government, which to avoid policy stalemate wants to win a majority in the upper house poll expected in July.

The fate of Japan Post could also sway financial markets and the financial industry because the entity, which has retail banking and insurance services, is the world's largest financial conglomerate with financial assets of about 300 trillion yen ($3.2 trillion).

Following are some questions and answers about Japan Post and why it matters to markets and politics.

WHAT IS JAPAN POST, WHY IS IT IMPORTANT?

Postal service operator Japan Post provides retail banking and insurance services through its 24,000 post offices.

With financial assets worth more than France's GDP, it is Japan's largest financial institution. It is also about 1.5 times the size of the nation's largest private banking group, Mitsubishi UFJ Financial Group (8306.T) (MTU.N).

That means even small changes in its portfolio or business strategy can sway financial markets and the financial industry.

It is also one of Japan's largest companies, with 240,000 employees and annual revenue of 20 trillion yen.

Currently, the group has one stockholding company and four subsidiary businesses focusing on banking, insurance, deliveries and post office services.

WHY IS PRIVATISATION BEING SCALED BACK?

Japan began privatising the postal system after former Junichiro Koizumi led his Liberal Democratic Party (LDP) to a huge election win in 2005 that was seen as a referendum on postal reform.

The LDP planned to spin off the two financial arms, Japan Post Bank and Japan Post Insurance, and sell two-thirds of the holding company by 2017.

But Hatoyama, whose Democrats ousted the LDP in an election last August, froze privatisation on the grounds it ignored the needs of consumers and led to closures of post offices in rural areas.

Last week, outspoken banking minister Shizuka Kamei unveiled a proposal for the government to merge the entity's deliveries and postal services into the parent company.

Under the proposal, the government would retain more than one-third of the shares of the parent company, enough to allow it to veto any major changes at the firm.

The parent company in turn would hold more than one-third of shares in each of the two financial subsidiaries -- Japan Post Bank and Japan Post Insurance.

With the profitability of its deliveries and post office services likely to suffer from increased e-mail use and Japan's shrinking population, Japan Post's financial services are considered the golden goose.

WHY IS THE GOVERNMENT SPLIT ON KAMEI'S PLAN?

Kamei has also called for Japan Post to double its limit on deposits to 20 million yen per person, a move that could trigger an inflow of deposits into its banking service from private banks. [ID:nTOE62O03J]

Kamei, head of the tiny People's New Party (PNP) in Hatoyama's coalition government, is keen to appeal to postal office chiefs -- a key support group -- ahead of the upper house election. The PNP began as a group of former LDP lawmakers opposed to Koizumi's postal reforms.

But other cabinet ministers have called for more discussion on Kamei's proposal, mindful of market concerns an increase in Japan Post's assets could be a ploy for it to buy more government bonds and subsidise already mammoth public debt.

Hatoyama will likely be careful not to upset Kamei and his small party, whose support he needs in his coalition to pass bills smoothly in parliament.

But failure by cabinet ministers to iron out differences could further dent public support for Hatoyama's six-month-old government, which has slid to around 30 percent in some polls due to voter doubts about the premier's leadership skills.

Hatoyama is already under fire for allowing his tiny coalition partners to have too much say in policymaking.

WILL JAPAN POST'S INVESTMENT PORTFOLIO CHANGE?

About three-quarters of the funds of Japan Post's two financial arms is invested in Japanese government bonds, making the group the largest single JGB holder with about 33 percent of the market.

Most of the remainder goes to other bonds and loans, and it holds a very small amount of shares and foreign currency assets.

But a government report has said it is unrealistic for the behemoth to make a big change to its portfolio in a short time.

Japan Post could start reducing its JGB holdings in the future but it will likely move very cautiously as selling JGBs could rattle the market when the national debt is nearing 200 percent of gross domestic product.

Kamei, the banking minister, has said he wants Japan Post to diversify and it could buy more U.S. Treasuries, but he has also said its money is important for the stability of the domestic bond market.

Japan Post tried to expand its lending business after the government began its 10-year privatisation process in 2007, but its efforts fell through and it continued to buy JGBs.

In the short-term, the privatisation plan is unlikely to have any impact on its investment strategy. However, the longer-term outlook is unclear as much would depend on how much control the government retains.

WILL JAPAN'S FINANCIAL INDUSTRY BE AFFECTED?

With privatisation plans still up in the air, the main concern for the financial industry at the moment is whether the government raises the limit on deposits.

The government could go ahead with Kamei's proposal to raise Japan Post Bank's limit on deposits from the current 10 million yen per person to support the banking business, but the move is likely to draw heavy criticism from private banks.

Banks complain that Japan Post still enjoys an implicit government guarantee, although the government lifted guarantees on deposits and insurance when it began the privatisation process.

($1=92.52 yen)