Japan's Keiretsu: Rise and Fall by Daniel Tan C'21 W'21

Capitalism comes in many flavors. In the US, a Smithian legacy persists: if everyone does what they do best, everyone benefits. Following this formula, large corporations like Apple, Nike, and McDonald’s specialize in specific sectors. In Japan, however, a jack-of-all-trades corporate titan is more common, where massive conglomerates have their hand in every conceivable industry, from life insurance and filmmaking to automobiles and retail.

That nothing seems to link these industries is normal, and is in fact a regular feature of Japanese business structures. Most Americans, for instance, would be surprised to know that Sapporo Brewery, Nissan, Yamaha and Canon are united under one conglomerate.

These vast holding companies are called keiretsu (literally grouping of enterprises) and consist of dozens of corporations loosely connected by interlocking business relationships and shareholdings. The closest American equivalent is perhaps the private equity firm, whose investment portfolio can span just as wide a gamut as a keiretsu, though the personal relationships between businesses owned by private equity are not nearly as strong as those in a keiretsu. In most cases, no relationships exist at all.

Arguably, these interlocking relationships are the defining factor of keiretsu. Keiretsu emerged from the ashes of zaibatsu, a centrally organized business structure oriented around family kinship. Following the end of WWII, Americans wary of the role that zaibatsu played in fueling Japanese militarism abolished the zaibatsu, but inevitably the commercial relationships remained. In its new form, however, it was business rather than blood ties that would unite corporations. This proved to be a welcome change.

"Zaibatsu dissolution was a major factor in Japan's high postwar growth," claimed Uemura Kogoro, former president of Keidanren, Japan's most influential business organization. The deconstruction of family ties in favor of strictly business relationships opened new channels for competition, playing no small role in spurring Japan’s so-called ‘economic miracle.’

The business relationships between otherwise disparate industries created an interconnected web of mutual interests. Directors sat on the board of many firms, and each company owned small shares of many other companies. This interlocking system provided a measure of stability, allowing CEOs to prioritize long-term growth without having to worry about short-term trends like quarterly investor demands, stock market fluctuations, and hostile takeovers. It also made possible the type of national economic planning that Japan, through its famed Ministry of International Trade and Industry, would successfully promote.

In this developmental model, the Japanese bureaucracy would identify promising areas for growth and investment, and provide strong incentives for keiretsu to implement its economic vision. The primary drivers of growth at the time, namely the electronics and automobile industries, responded well to a heavy-handed and top-down approach. In the sixties, for example, Japan saw rapid double-digit growth that transformed the wartorn society into one poised to challenge American hegemony.

Then it all came crashing down. Real wages plummeted, stagnation struck, and bubbles burst. Suddenly Japan, which had caught the world off guard with its growth, saw itself caught off guard by the world. So protracted was this economic downtown that many say Japan ‘lost a decade’ in the nineties, though the setback continues to the present day.

Pundits blame a wide array of factors for Japan’s stagflation. Some call attention to Japan’s rejection of immigration in spite of low-birth rates and soaring elderly population. Others blame the keiretsu itself: once the system that enabled meteoric growth, now the keiretsu only seem to weigh Japan down.

While both views are well-merited, the latter claim deserves special focus if we are to evaluate Japan from a business point-of-view. Today’s innovative industries are unlike those of the fifties and sixties. The IT industry, for instance, demands grassroots innovation to sustain its perpetually disruptive will. Colossal keiretsu seem anathema to this brand of decentralized entrepreneurship. Indeed, the vast web of keiretsu interests which in the past achieved harmonious, coordinated, and long-term growth now appear bureaucratic, inflexible, and unsuited to explosive innovation.

As is often the case with miracle-makers, the keiretsu ultimately revealed itself as a double-edged sword. While exceptionally successful in leading Japan’s initial stages of post-war growth, keiretsu look increasingly out of place in a world driven by nimble and industry-specific start-ups. In the past, keiretsu claimed Japan’s rise. Now, they must own its fall.

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