By Jeremy Scott-Joynt
BBC News business reporter
Japan's economy could face difficulties in the run-up to a snap election, called by its prime minister after MPs threw out a key part of his reform agenda.
Japan Post has been a cash cow for the Japanese government
Junichiro Koizumi's government has been trying to privatise Japan's massive post office, which holds more than $3 trillion dollars in consumers' savings.
The savings paid for massive public works projects, which won votes but deepened Japan's massive public debt.
Now experts worry that the setback could mean less foreign investment.
"I don't think the government realises the foreign investment flowing seriously back into Japan was very much buying the reform story," said Kirby Daley, a strategist at Societe Generale securities division.
Japan's stock market was little moved by the news, buoyed by recent healthy economic news and solid corporate earnings.
Indeed, the benchmark Nikkei 225 index closed on Monday slightly higher, having fallen 1% ahead of the Upper House of Parliament's vote on the government's planned postal reform.
But the collapse of the plan still could spell trouble.
Japan's financial sector has long been warped by the 350 trillion yen ($3.3 trillion) held by the postal savings system.
Japanese households have always been heavy savers, and for years they have put their money in the post office savings bank.
They had little incentive to put money elsewhere.
Japan's banking sector nearly collapsed after struggling under the weight of huge bad debts run up in the free-spending 1980s.
And the banks also offered near-zero interest rates on savings, because the government has kept interest rates low for most of the past decade to boost the fragile economy.
So most private individuals in Japan put their money in a safe place - and in the hands of the government.
In turn, the postal savings bank effectively lent the money to the government by buying Japanese government bonds.
The result has been a huge pot of cheap money available to fund public works projects.
Junichiro Koizumi is betting everything on the postal reforms
Rural areas all over Japan have gained dams, bridges and multi-lane highways - creating work, putting money into the construction industry, and ensuring a stream of votes for Liberal Democratic Party MPs.
Rural postmasters are also widely believed to have been active in getting out the vote for the LDP.
The system has helped the party, now led by Mr Koizumi, to hold onto power for all but three years in the past half-century.
But it has also warped the public purse, creating an opaque second budget and encouraging wasteful public spending.
It has also got in the way of innovation in the financial services business.
The post office insurance arm, for example, is almost as big as the four largest private insurers put together.
Mr Koizumi's plan - now on the back-burner - called for the post office, with its 25,000 offices and 270,000 staff, to be split into four units under a state-controlled holding company.
The holding company would then sell off the insurance and savings businesses by 2017.
If Mr Koizumi wins the election, it could be on a reduced majority, since the LDP may withhold funds from the more obstreperous MPs.
The plan is likely to be resuscitated under those circumstances.
"If the LDP manages to shake out the old guards and evolve into a more reform-minded force, that would be highly desirable," said Takehiro Sato, economist at Morgan Stanley.
The markets are waiting to see what happens in the poll
There is a chance, however, that reform-minded MPs could leave the party - as they did in 1993, resulting in the LDP's only experience of opposition since its founding in 1955.
That could persuade coalition partner New Komeito to switch sides, backing the main opposition New Democratic Party.
Alternatively, the LDP could lose its more stubborn members - who have been more of an obstruction than the official opposition - allowing it to ally with the DPJ.
"If there is a change of government, all depends on the quality of the administration," Mr Sato said. "If that coalition centres on a reformist agenda, the great distortion in Japan's politics would be resolved."