How Japan’s economy was built to withstand foreign takeover

By Luke Mahoney, grape Japan
Photo: OiMax | ©

Like in other developed nations, Japan's central bank (BOJ) has issued loans to companies at risk of collapse during the pandemic. Many small- and medium-sized enterprises saw demand evaporate throughout the outbreak as customers largely stayed home. Owing to social distancing and consumer anxieties, the services industry was particularly hard hit. For operations such as these, BOJ loans are a lifeline.

Nevertheless, loan programs appear to have unintended—and undesirable—consequences. According to analysts, excessive lending may lead to the creation of “zombie firms,” indebted and unprofitable companies dependent upon government assistance, if relied on too heavily during the economic downturn.

Due to its unique socioeconomics, Japan is sensitive to the type of “economic rot” these entities imply. A cultural reservation against layoffs further burdens corporate productivity, while pushing down profits and wages. All of which are occurring during a labor shortage as the percentage of retirees reaches new highs. Unfortunately, zombie firms are hoarding labor that could be better used elsewhere in the economy. Furthermore, monopolistic practices may be perverting the price of goods.

Yet, such a situation is hardly surprising in the land of the rising sun. Since at least the Meiji period, the government has provided serious economic guidance, heavy-handedly influencing how industries throughout the country developed. While this influence fueled rapid development and the "Japanese economic miracle,” excessive government meddling, in the form of mandated lending, likely contributed to a bubble and the economic malaise of the 1990s. For better or worse, this orchestrated interplay between the government and industry has a long history that continues to this day.

The History of Zaibatsu

The 1868 Meiji Restoration of Japan saw the imperial rule of the Emperor restored. This political shift occurred in the aftermath of the Perry Expedition, which opened Japan to trade. Around that time, ruling parties in Japan feared colonization by technologically-superior Western powers and sought to industrialize rapidly. Towards this end, Japan consolidated governmental powers and established a state-guided capitalist economy.

Hoping to emulate the success of the Rockefellers and JP Morgan in the West, the Meiji government also established powerful conglomerates centered around prominent family-owned holding companies. Known as zaibatsu, the government subsidized the sale of industries to these corporate entities. The original “big four” zaibatsu included Sumitomo, Mitsui, Mitsubishi, and Yasuda—familiar names in corporate Japan.

Prior to WWII, the zaibatsu grew to become massive entities. Vertically and horizontally integrated across numerous industries, they controlled extensive supply chains and raw materials.

These conglomerates' strict integration and government relationship also allowed Japan to industrialize quickly throughout the late 19th and early 20th centuries. Nevertheless, their close ties to the government and military led to their dissolution in the aftermath of WWII. After occupying forces left in the country in 1952, they would again reform as keiretsu.


In modern-day Japan, there is a close relationship among industrial and financial sectors as well as the government. In line with a cultural tendency towards cooperation, businesses and other economic entities are closely integrated, often comprising corporate groups known as keiretsu. Like zaibatsu, keiretsu are horizontally and vertically integrated across supply chains. They also incorporate generalized trading companies known as sogo shosha.

Due to their close-knit structure, these economic groups are influential and, by and large, efficient. They provide significant economic stability while helping to disseminate knowledge and know-how throughout Japanese industries. Many economists also attribute the country’s rapid economic growth throughout the 20th century to these conglomerates' productivity.

Indeed, keiretsu influences make many a household name. While Sumitomo and Mizuho are familiar to most, perhaps the Mitsubishi group is the most well-known. The conglomerate is centered around The Bank of Tokyo-Mitsubishi, one of the largest banks in Japan. Mitsubishi Motors, Mitsubishi Trust and Banking, and Meiji Mutual Life Insurance Company are also notable players in this keiretsu. Together with the Mistsubishi Shoji trading company, the group is a major player in international business and finance.

Cross Shareholding

Yet, criticism of these conglomerates is not hard to come by. Most pertinent, countries like the United States have accused keiretsu groups of unfair business practices aiming to shut down foreign competition. Adding to monopolistic tendencies, their massive structure can limit the Japanese economy's ability to progress and innovate.

This is likely by design. The keiretsu came into being during the 1960s and 1970s, when several American companies were becoming behemoths. Like the zaibatsu before them, keiretsu insulated Japan from foreign encroachment, this time in terms of mergers and acquisitions. The group's cross-shareholding, constituent companies' tendency to hold one another's equities, increases capital mobility within the conglomerates and isolates them from outside investors. Even in the 21st century, this basic structure remains, limiting keiretsu vulnerability toward influence by foreign investors, although it continues to open more to foreign investment.

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© grape Japan

©2020 GPlusMedia Inc.

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Very informative article. This information has been out there for a long time but needs to be refreshed occasionally; nothing really changes. Allot of US industrial and household brands are actually owned by Japanese, and US brands in Japan are usually owned by a japanese subsidiary or wholly owned and silenced. When a US politician starts talking about creating "clean" energy jobs, I suspect they have a micron depth of understanding of how it all works. A "clean" Chinese or Japanese solar panel mfg who is welcomed to the US with tax subsidies etc is not exactly contributing to creating jobs, long term, but rather inviting predatory business practices, that can harm you later.

2 ( +2 / -0 )

"Even in the 21st century, this basic structure remains, limiting keiretsu vulnerability toward influence by foreign investors, although it continues to open more to foreign investment."

That's not true.

According to JT "expertise" Japan is bankrupt. They only have some monopoly money to play with.

All they had belongs to the Chinese now.

-2 ( +2 / -4 )

The dirty secret is that most large Japanese firms are essentially bankrupt and reliant on government handouts, which is why there is no transparency in their accounting and financial management. No foreign investor would consider buying, or merging with, a company whose financial statements are not in order, or indicate some sort of malfeasance or large amounts of outstanding debt. This is what keeps Japanese companies "safe"...

In the end, it is the taxpayers who bear these costs - money wasted propping up the failed corporations of Japan Inc could instead be redirected to improving many aspects of citizens' lives - but Japanese citizens, (and foreign residents ) are treated as serfs who live to be exploited by this system - just as they always have been.

3 ( +6 / -3 )

Keiretsu have existed in some form since the Meiji Era/Industrial Revolution, when they were called zaibatsu and are tied to the aristocratic families that permeate "modern" Japanese politics. They were the backbone of the Japanese economy and supported military adventurism beginning with the Russo-Japanese war, right through 1945. Many of their facilities were destroyed by US bombing during the war, but they were resurected and restructured afterward with US aid to provide post-war employment and as an idustrial bulwark to protect the newest member of the US global empire against communist Russia and China. They were "broken up" in name only, and remained integrated through cross-shareholding within vertical corporate structures composed of affiliated companies.

“The keiretsu are pale shadows of what they used to be,” says Lincoln. “Many Japanese will say they’re gone altogether. Companies in some countries—Germany in particular—have done much better than U.S. companies at getting their products in the hands of Japanese consumers. German cars are everywhere in Japan, while U.S. cars are extremely scarce. The Japanese say this is because U.S. companies don't try hard enough. (Americans') short-term orientation and high turnover of executives compel them to get out if they don't get good results early on. On the other hand, much of Japanese business activity still has the look and feel of keiretsu even if the groups per se are mostly gone.”

Back in 2011, when Japanese camera maker Olympus bought out medical equipment manufacturer Gyrus Group for $2.2 billion USD, nobody outside Olympus (and few inside) seemed to know where all the money went. According to a Reuters story at the time, a third of that sum was paid as an advisory fee to a third-party company; advisory fees are typically only 1 to 2 percent. What's more, according to a New York Times story, Olympus moved the “advisory fee” first to Axes America, a minor brokerage firm, which then moved it to a brand-new company founded in the Cayman Islands, which then transferred the money somewhere else. Axes America and the Cayman Islands company shut down soon after, and when Olympus' new chief executive Michael Woodford called for an investigation into why that much money was moved around so shadily, he was immediately and unanimously removed by Olympus' board of directors.

“The Olympus scandal was handled in a way that was right out of the old keiretsu playbook,” Lincoln says. “I think a lot of observers of the Japanese economy would agree that, while the groups per se no longer amount to much, keiretsu 'culture' still wields a lot of sway in Japan.”

4 ( +4 / -0 )

Good article and equally good comments.

As a former 'tenured' professor at a Japanese college (and a year at Nissho Iwai ... a former Sogo Shosha), in the description of Keiritsu as the conglomeration of industrial, financial, and government, I would add 'educational' institutions to that mix.

I still remember former Prime Minister Abe's plan to make Japanese universities world class by bringing in foreign talent with a world reputation ... but almost in the same breath, appointing an impromptu MEXT committee to try and coerce all public universities to drastically scale back or shut down departments of humanities and social sciences. Only a few of the more financially secure private universities could afford to question the LDP's policy shift. In one sense, the LDP plan was not contradictory because it would have reduced public universities to makers of STEM gadgets, but with only the ruling class having the 'wisdom' or right to know how or where to apply that expertise. But in another sense, it was contradictory. How does one produce robots with A.I. worth its salt ... without social psychologists, anthropologists, and other liberal arts. Kind of begs the question of 'human intelligence' behind those policies.

This vision has fallen short in a number of other ways.

1 — Japan has NOT developed renown for its universities, and is considered by many, 2nd tier even among schools in Far East Asia. Rather, a lot of small, for-profit 'colleges' have sprung up like mushrooms filling the gap for migrant workers by providing perfunctory student visas. The majority of the few foreign university teachers here are temporary migrant workers themselves, 'academic dekasegi' on short contracts ... whether in a STEM field or on the English teaching circuit. Looking at fields where Japan excels ... genetics, robotics, and primatology ... or fields where the don't ... the liberal arts, humanities, the social sciences, and journalism ... other than occasional guest lectures or visits by likes of Noam Chomsky, Michael Sandel, or Frans de Waal ... I don't recall any non-Japanese researcher of world renown working for a Japanese educational institution, much less in a tenured position. From personal experience, labor law and work contracts here in Japan are just a pro forma cover, serving those who manage the Keiretsu, not the individual working within them.

2 — This is not restricted to foreigners. Just last week, NHK announced a continuing drop in the number of Japanese opting for a terminal degree (Ph.D) in their chosen field of study, largely because the big players in Keiretsu do not acknowledge and financially reward creative (and therefore potentially disruptive) expertise in their field. Entry salaries do not reflect that extra three years required for a Ph.D. Notice how quiet the mass media is with the 'sports-competition-propaganda-model' of the Nobel Prize this year? At least one recent Japanese Nobel laureate bemoaned this as a sign of things to come if the short sighted, current business model and government policies do not encourage basic research. The graphs in this article tell it all ... It was just a few years earlier that the government had another warning when Nobel prize winner Shuji Nakamura (blue light LEDs) pointed out the discrepancy between Japanese patent law, and how it is implemented by the Keiretsu — again, 'law and contracts' as just another tool to control the little people, and when that won't work, traditions or algorithms will do. He was not the first Japanese STEM laureate to urge young Japanese with talent and passion to leave Japan ASAP.

3 — In placing more resources on propping up zombie companies — and Japanese universities are the quintessential zombie company — Japan is beginning to lose even its short-term, economic competitive edge. If the schools were more like educational communities, and leadership was accountable to community stakeholders, schools would be innovative centers for cultural and technical problem-solving. But, again, from my experience, schools tend to be run by bureaucratic functionaries, not accountable to the needs of the local community or the needs of citizens of the nation-state, or even to their own students ... but to government 'stockholders' through government subsidies. While Japanese cars are still world leading, companies like Tesla are beginning to make a dent. And smart phones, televisions, solar power, and probably newer battery technology is quickly losing ground to Chinese and Korean counterparts. If this trend continues, the service sector, and public infrastructure will increasingly have to rely on the hospitality and tourist industry to market and mass produce Japanese cultural exceptionalism. As we are seeing in a comparison between J-pop and K-pop, that too, may be a failing strategy. There are only so many Olympic events to go around.

Though Keiretsu is a Japanese phenomenon, the underlying group dynamics of social psychology are universal — the social primate trying to become the world's first, only, and final 'herding primate' ... and failing by becoming swarming primates. In the U.S., one phrase we use is 'Too Big to Fail' ... until it does. Again and again. More than Hegelian dialectics, I see pretty (and pretty disastrous) mandelbrot sets before my eyes. Meh, maybe just one too many grapefruit sours.

0 ( +0 / -0 )

"...excessive government meddling, in the form of mandated lending, likely contributed to a bubble and the economic malaise of the 1990s."

Not really, It was caused by greedy banks and speculators who didn't bother to employ any risk analysis in their decisions. The borrowers put up stocks with inflated values as collateral, for example, which the banks accepted.

I knew a guy in Osaka who bought a house and then kept it purposely empty, at a time when middle income people were struggling to afford a home. These are the people most responsible for the bubble.

0 ( +0 / -0 )

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