KUBTY Kubota Corporation (PK)

TOKYO—It is Japan's largest privatization in decades, offering investors a chance to buy into a company with more than $2 trillion in assets.

But for all the enthusiasm here over the initial public offering Wednesday of Japan Post Holdings Co., this is far from a normal private company. It still has to deliver mail to everyone, regardless of profit, and its banking unit can't make home loans, to name just two of the shackles with which it starts life as a publicly traded company.

"Unless Japan Post Bank is permitted to expand into new businesses, it may be hard to boost profits," said Rakuten Securities chief strategist Masayuki Kubota.

In Wednesday's IPO, the government is selling 11% of the shares of Japan Post Holdings to the public, and the holding company in turn is selling 11% of the shares of its banking and insurance units.

The triple listing has drawn strong interest from Japanese retail investors, many of them buying stocks for the first time, thanks to the public's familiarity with the post office and a dividend yield likely to top 2%. Together, the share offerings are set to fetch around $12 billion, making it the largest asset sale by the government in nearly 30 years.

The government plans to sell as much as two-thirds of the holding company and ultimately the two financial units are supposed to be fully privatized, although no date has been set. "The future business depends on how soon the government starts selling its shares toward the full privatization," said Mr. Kubota of Rakuten Securities.

The group has 24,000 post offices, far outnumbering all branches of Japan's national banks combined. Most deliver mail, take bank deposits and sell life insurance in the same building. In rural areas, they often serve as the principal lifeline to the outside world of commerce.

The business challenge of a privatized Japan Post starts with its postal-delivery unit, which has been recording small operating losses in recent quarters and has little hope of a turnaround since the population of most of rural Japan is steadily falling.

Restructuring to cut costs is hard. Postmasters are some of the most reliable supporters for rural lawmakers in Prime Minister Shinzo Abe's ruling party, and their connections can help them corral thousands of votes. Some of these postmasters own the land under the post offices and pass down their jobs in the family.

Even the group's biggest earner, Japan Post Bank, faces challenges. Though it is the country's largest bank by deposits, it has only about 230 branches on its own, relying on the postal-delivery arm's post offices to collect deposits, which are limited to ¥ 10 million (US$83,000) per customer. The bank can't make home loans or most other types of loans.

The limits are rooted in the post office's origin in 1871 as a state-owned entity designed to bring basic postal and financial services to distant corners of Japan. Until the early 2000s, few imagined that the behemoth could be a candidate for privatization, even after Japan privatized its national railway and phone company. In 2005, then-Prime Minister Junichiro Koizumi, saying the nation's economy needed a shake-up, made privatization the centerpiece of an election campaign. He won in a landslide, prompting parliament to pass privatization legislation.

JP Bank controls more than ¥ 200 trillion ($1.7 trillion) in assets, making it one of the world's largest asset managers. Its main profit comes from what it earns on those assets.

About half of the money is in Japanese government bonds. While they have proven a good investment in Japan's slow-growing economy, yields are now at a rock-bottom 0.3% on 10-year government bonds, and the prospect for further gains is limited.

That is why JP Bank is trying to manage money more aggressively. In its midterm business plan released in April, Japan Post said the bank would increase its investments in foreign bonds and stocks by 30% over the next three years to ¥ 60 trillion.

Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management, said he expected a solid debut for the Japan Post IPO because investors see it as a way to dip their toes into slightly riskier assets while sticking with a government-backed entity.

"There is strong demand among retail investors who want to get into asset management and think stocks are more attractive than Japanese government bonds," Mr. Akino said.

JP bank has hired Katsunori Sago, a former executive with Goldman Sachs Group Inc. in Japan, to head the asset-management team. Specialists from Goldman Sachs and Barclays PLC have joined.

In June, a group of ruling-party lawmakers proposed tripling the deposit ceiling on postal savings to ¥ 30 million. Commercial banks, which have been battling for decades to keep restrictions on the postal bank, oppose the idea, saying JP Bank needs to hedge against existing risks before it can be trusted to get even bigger.

JP Bank "carries an enormous amount of interest-rate risk," said Yasuhiro Sato, chief executive of Japanese megabank Mizuho Financial Group Inc. and chairman of the Japanese Bankers Association, at a news conference in July. "We think these kinds of problems are going to be spotlighted even more as a publicly traded company."

Write to Atsuko Fukase at atsuko.fukase@wsj.com

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November 02, 2015 11:05 ET (16:05 GMT)

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