Mr Koizumi has struggled to bring his party with him on reform

Prime Minister Junichiro Koizumi has signed off on a programme starting in 2007 and lasting a decade.

The plan has been watered down in the hope of calming ardent opposition from his own MPs, who fear mass lay-offs.

The system's 350 trillion yen ($3.2 trillion; �1.7 trillion) in assets have provided a source of spare cash for politicians' pet projects.

Mr Koizumi made privatisation one of his earliest priorities when he came into office in 2001.

The system has long been popular with Japanese savers, accustomed to rock-bottom rates of interest.

But it has therefore kept savings away from the private sector.

Rivals

There are about 25,000 post offices nationwide selling the system's savings and insurance products, as well as regular postal services.

It will be a godzilla bank Jesper Koll, Merrill Lynch

In contrast, the seven main national banks have only 2,600 branches between them, although that figure does not include the dozens of regional banks also offering financial services.

A key fear is that its size will give it an unfair advantage over its existing private-sector rivals, and that the reforms will fail to regulate it sufficiently.

Its 227 trillion yen in savings deposits dwarfs those of its nearest competitor, Mitsubishi Tokyo Financial Group, which has 67 trillion. The system's 122 trillion yen in insurance assets are also scaring the insurance business.

"It will be a godzilla bank," said Merrill Lynch's Jesper Koll.

"It will be the beginning of an era of fierce competition with private financial institutions.

Fight ahead

Opposition within the ruling Liberal Democratic Party to selling off the system remains fierce.

One key concern is the fate of the 300,000 or so staff.

Another is the fact that in many rural areas, postal savings offer the only easily-accessible financial services available.

To stem that concern, Mr Koizumi has back-tracked on one key reform, and promised that the system will have a duty to offer nationwide services even after it goes private.

Branches will also have to continue offering both savings and insurance across the board, rather than being able to cherry-pick.

Despite the concessions, the LDP will lose access to the pork-barrel possibilities of the 350 trillion yen lodged in the system

The sell-off will first see a holding company take control of the system, with separate units for savings, insurance, postal services and a fourth for personnel and property management.