Japan's lower house of parliament approved legislation Tuesday that sets in motion a plan to split up and privatize the massive state-run postal system, whose savings and insurance divisions represent a financial empire that has been a big source of funds for government projects.

The passage of the bills, which still need to pass the less-powerful upper house, is a victory for Prime Minister Junichiro Koizumi's campaign to reduce the size of the Japanese government. Privatization of the postal system is one of Koizumi's long-held aims. While it won't spark instant change, analysts say it will continue Japan's push away from trying to boost the economy through government spending, which spawned massive road and bridge-building projects labeled by critics as wasteful.

The savings and insurance divisions of Japan Post control some $3.1 trillion in deposits. That represents about a quarter of Japanese household savings, and is equivalent to two-thirds of the country's annual gross domestic product.

Until 2001, the post office had to give these deposits to the Ministry of Finance to invest, thus forming a kind of second national budget. Even today, Japan Post is the largest buyer of Japanese government bonds.

Privatization could change that. The government's guarantee on postal deposits eventually will be removed, giving other financial institutions a better chance of competing to manage the funds. Such competition means the privatized postal institutions will have to develop better ways of investing the funds, probably by delegating this management to other financial firms.

"It's hugely significant, because the funds will have to be managed on market principles," said Robert A. Feldman, chief economist in Morgan Stanley's Tokyo office. "What they need to do is make a profit."

Before the bills are enacted, they must go to a vote in the upper house, expected before the current session of parliament ends Aug. 13.

But even if they don't pass the upper house, the more powerful lower house could override this by approving the changes in a second vote.

If the bills are enacted, four businesses will carry out mail delivery, banking, insurance and the administration of Japan's network of 25,000 post-office branches beginning in 2007. Though the four companies will be grouped under a government-owned holding company at first, the holding company will have to sell its shares in the banking and insurance businesses by 2017.

Getting the legislation through the lower house was a struggle, and it passed by a narrow margin. The country's 400,000 postal workers fiercely oppose the privatization, as the bills end their civil-service status, making their jobs less secure. About 3,000 postal workers demonstrated against the bills in central Tokyo on Monday.

These workers have traditionally been supporters of Koizumi's ruling Liberal Democratic Party, and a group of its lawmakers persuaded the government last week to sweeten certain aspects of the bills. For example, the size of a fund to help maintain service even in isolated areas was increased from 1 trillion yen to potentially twice that amount.

Such moves mean the results of privatization will be slow, analysts say.

"These reforms are very glacial. You're not going to notice them overnight," said Jason Rogers, a banking analyst at Barclays Capital in Tokyo. In the long term, however, privatization would be a big change for Japan, he said. "This is a process of decentralizing the government."

As well as opening up Japan's financial sector to more competition, the privatization will create a giant competitor for other institutions in Japan.

Japanese Prime Minister Junichiro Koizumi says privatizing the postal system, and its insurance and savings operations, is part of a larger strategy to reduce reliance on government spending.