“Zaibatsu” and “Keiretsu” - Understanding
Japanese Enterprise Groups
Anybody
who is familiar with Japan will recognize the words zaibatsu and
keiretsu. Few, however, know of their meaning and historical significance.
This is the first of several articles that will explain the origin,
historical significance and the current circumstances of Japan’s
enterprise groups, all of which we loosely tend to refer to as zaibatsu
and keiretsu.
This initial article explains the origins of the zaibatsu.
Zaibatsu Formation in the Meiji Era (1868 – 1912)
Zaibatsu generally refers to the large pre-WWII clusterings of Japanese
enterprises, which controlled diverse business sectors in the Japanese
economy. They were typically controlled by a singular holding company
structure and owned by families and/or clans of wealthy Japanese.
The zaibatsu exercised control via parent companies, which directed
subsidiaries that enjoyed oligopolistic positions in the pre-WWII
Japanese market. These economic groupings crystallized in the last
quarter of the 19th century during the Meiji Reformation.
Zaibatsu first became a popular term among management and economics
experts when the term appeared in the book History of Financial
Power in Japan (Nihon Kinken Shi) as published late in the Meiji
Era. Even in Japan, the term was not commonly used until the mass
media adopted it in the late 1920’s.
The zaibatsu were formed from the Meiji government’s policies
of state entrepreneurialism, which characterized the modernization
of the economy during that era. To understand the significance of
zaibatsu, one must consider at the onset of the Meiji era, agriculture
comprised 70% of Japan’s national production, and approximately
three quarters of Japan worked in farming related jobs. The government
used land tax revenues to fund the state planning, building and
financing of industries determined by bureaucrats to be necessary
for Japan’s economic development. Meiji bureaucrats did not
rely on the free market in reforming the economy, but they also
did not develop the economy alone.
In the 1880’s the Meiji government sold some government-owned
enterprises on special terms to a chosen financial oligarchy implicitly
entrusted with the public interest in developing the national economy.
These enterprises were entrusted to the influential concerns known
as the Mitsui, Mitsubishi, Sumitomo, Yasuda, Okura and Asano groups.
These private parties and enterprises crystallized over time into
large, integrated complexes steered by the government bureaucrats
into areas of development desired for the reformation of Japan.
To secure compliance, the government provided inducements such as
exclusive licenses, capital funding, and other privileges. Although
Japan badly needed foreign technology, know-how and capital, the
government adopted a policy of shutting out foreign entrepreneurs
with few exceptions in favor of domestic development.
After WWI, when Japan’s economy made huge strides in economic
reformation, the zaibatsu interests began to enter the political
arena to support their interests. Their activities became entwined
with the government in wartime Japan. Eventually, the Potsdam Declaration
that was signed in 1945 required the liquidation of the zaibatsu
as one step to democratize Japan’s post-war economy.
Zaibatsu Control Structures
Unlike the current situation in Japan, it is said that the zaibatsu
stockholders were relatively strong. While zaibatsu holding companies
directed the enterprise complexes in a pyramid fashion, stockholding
relations cemented together the companies within zaibatsu complexes.
Characteristics of the complexes included holdings by members of
more than half of the holding company’s stock, and the position
of the holding company as the overwhelmingly largest shareholder
of companies within the complex. The stock of members was rarely
sold by other members to third parties. Under this structure, zaibatsu
and their leading holding companies drove the finance, heavy industry
and shipping sectors that forged the heart of Japan’s economy.
By the 1920’s zaibatsu economic power engulfed the sectors
of finance, trading and many major large-scale industries. From
1914 to 1929, three zaibatsu (Mitsui, Mitsubishi and Sumitomo) controlled
28% of the total assets of the top 100 Japanese companies. Even
as of 1945, the same complexes possessed 22.9% of the total assets
of all Japanese stock companies.
As will be explained in Part II of this series, subsequent to the
liquidation of the zaibatsu pursuant to the Potsdam Declaration,
new enterprise complexes and groups that resembled the zaibatsu
were resurrected in Japan. There are, however, significant differences
that distinguish the zaibatsu from the modern keiretsu. These differences
and the subsequent formation of the keiretsu will be discussed in
later articles.
Andrew H. Thorsen serves as a Partner in the Tokyo Office of
Dorsey & Whitney LLP, a U.S. law firm. The views of the author
are not necessarily the views of the firm of Dorsey & Whitney
LLP, and the author is solely and individually responsible for the
content above.
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