We gratefully acknowledge the generous financial assistance of the Sloan Foundation (Miwa and Ram... more We gratefully acknowledge the generous financial assistance of the Sloan Foundation (Miwa and Ramseyer) and the John M. Olin Center for Law, Eco nomics & Business at the Harvard Law School (Ramseyer). We thank the many officials of various suppliers who permitted and facilitated Miwa's interviews and on-site visits.
For Western economists and journalists, the most distinctive facet of the post-war Japanese busin... more For Western economists and journalists, the most distinctive facet of the post-war Japanese business world has been the keiretsu, or the insular business alliances among powerful corporations. Within keiretsu groups, argue these observers, firms preferentially trade, lend money, take and receive technical and financial assistance, and cement their ties through cross-shareholding agreements. In "The Fable of the Keiretsu", Yoshiro Miwa and J. Mark Ramseyer demonstrate that all this talk is really just urban legend. In their insightful analysis, the authors show that the very idea of the keiretsu was created and propagated by Marxist scholars in post-war Japan. Western scholars merely repatriated the legend to show the culturally contingent nature of modern economic analysis. Laying waste to the notion of keiretsu, the authors debunk several related "facts" as well: that Japanese firms maintain special arrangements with a "main bank," that firms are systematically poorly managed, and that the Japanese government guided post-war growth. In demolishing these long-held assumptions, they offer one of the few reliable chronicles of the realities of Japanese business.
The Japanese "main bank system" figures prominently in the recent literature on "relationship ban... more The Japanese "main bank system" figures prominently in the recent literature on "relationship banking." By most accounts, the main bank epitomizes relationship finance: traditionally, every large Japanese firm had one, and that bank monitored the firm, participated in its governance, acted as the delegated monitor for other creditors, and rescued the firm if it fell into financial distress. Yet all this has begun to change, continue these accounts. Japan deregulated its financial markets in the 1980s, and many firms abandoned their relational lender for market finance. As the main banks then lost their ability to the constrain firms-as relationship banking unraveled-the firms gambled in the stock and real estate bubbles, the bubbles burst, and the firms threw the country into recession. Using financial and governance data from 1980 through 1994, we show that none of this is true. The accounts of the Japanese main bank instead represent fables, stories we collectively recite because they so conveniently illustrate the theories and models we hope to develop. Whether during the 1980s boom or the 1990s recession, they bore no resemblance to any aspect of Japanese corporate finance or governance.
Economists and legal scholars routinely posit an implicit contract between Japanese firms and the... more Economists and legal scholars routinely posit an implicit contract between Japanese firms and their principal lender (called their "main bank"). Under this arrangement, the bank implicitly agrees to rescue the firm (through financial and managerial help) when times turn bad. Out of court, it rescues the firm from insolvency. Not only does it save the investments specific to the troubled firm, it lowers the use of costly bankruptcy proceedings and cuts the costs of those bankruptcy procedures it does occasionally invoke. Given the creditor-shareholder conflicts of interest that arise as firms approach insolvency, such arrangements would seem unstable. Yet according to a long sociological tradition, conflicts of interest are inherently less problematic in Japan than in the West. According to the emerging economic and legal tradition, Japanese economic actors do face those conflicts, but keep them in check through reputational concerns, close-knit ties, and government supervision. Using two datasets of troubled firms from the 1970s and 1980s, we ask whether Japanese main banks in fact rescue distressed borrowers. We find no evidence that they do: large Japanese firms fail; when large firms approach insolvency main banks do not increase the share of the firm's debt they bear; stronger ties between distressed firms and their main bank do not facilitate loans; and troubled firms do not try to preserve their main bank relationship. Instead, the claim that Japanese banks implicitly agree to rescue firms is sheer myth. Conflicts of interest do indeed matter in Japan-and they matter enough to prevent precisely the incentiveincompatible rescue deals that scholars in the field so routinely posit.
Observers of modern transitional economies urge firms there to ignore stock markets. Stock market... more Observers of modern transitional economies urge firms there to ignore stock markets. Stock markets simply will not work in such environments, they explain. Firms should instead rely on debt finance, particularly bank debt. Only then will they be able to keep principal-agent (i.e., investor-manager) slack to manageable levels. Turn-of-the-century Japanese firms faced problems that closely mirrored those in modern eastern Europe. Yet in Japan, the successful large firms did not rely on debt. Instead, they raised their funds through the stock market, and took a variety of steps to mitigate the principal-agent slack involved. As one of those steps, they recruited prominent investors to their boards. Using data on firms in the cotton-spinning industry (arguably the most important industrial sector in turn-of-the-century Japan), we explore why the firms recruited prominent directors. First, we note that firms with such directors had higher profits than others. In part, they probably had higher profits because such investors had an eye for firms that would likely succeed. In part too, however, they seem to have had higher profits because those investors brought basic management skills-they knew how to monitor and when to intervene. Second, prominence held constant, we find that firms did not have higher profits by having directors affiliated with a bank or with other spinning firms. One might have thought directors with access to a bank or spinning technology would raise profits at a firm. In fact, they did not, for banks did not have the funds to lend, and the technolgy was freely available. Last, we explore whether the directors certified firm quality on behalf of other investors. Although firms with prominent directors apparently did have an advantage in the capital market, we conclude that quality certification was at most a by-product (if even that) of the monitoring and intervention these directors performed.
Economists and legal scholars routinely posit an implicit contract between Japanese firms and the... more Economists and legal scholars routinely posit an implicit contract between Japanese firms and their principal lender (called their "main bank"). Under this arrangement, the bank implicitly agrees to rescue the firm (through financial and managerial help) when times turn bad. Out of court, it rescues the firm from insolvency. Not only does it save the investments specific to the troubled firm, it lowers the use of costly bankruptcy proceedings and cuts the costs of those bankruptcy procedures firms do occasionally invoke. Given the creditor-shareholder conflicts of interest that arise as firms approach insolvency, such arrangements would seem unstable. Yet according to a long sociological tradition, conflicts of interest matter less in Japan than in the West. According to the emerging economic and legal tradition, Japanese economic actors do face those conflicts, but keep them in check through reputational concerns, close-knit ties, and government supervision.
Many Americans picture the Allied (i.e., U.S.) Occupation of Japan (1945-52) as the quintessentia... more Many Americans picture the Allied (i.e., U.S.) Occupation of Japan (1945-52) as the quintessentially good occupation: elaborately planned in advance, idealistically administered until derailed by anti-Communist indeologues in its later years, it laid the foundation for Japan's postWar democracy and prosperity. In fact, the Americans-especially those Americans celebrated as most "idealist"-did not plan a Japanese recovery, and for the first several years did not work for one. Instead, they mostly just planned retribution: whom to hang, and which firms to shutter. Economic issues they entrusted to Japanese bureaucrats, and those bureaucrats merely manipulated the controls they had used to disastrous effect during the War. Coming from a New Deal background in Washington, the Americans enthusiastically urged them on. Although the Japanese economy did grow, it did not grow because of the Occupation. It grew in spite of it. In early 1949, Japanese voters overwhelmingly rejected the political parties offering economic controls. In their stead, they elected center-right politicians offering a non-interventionist platform. These politicians then dismantled the controls, and (despite strong opposition from New Deal bureaucrats in the Occupation) imposed a largely non-interventionist framework. As a result of that choice-and not as result of anything the Occupation did-the Japanese economy grew.
Journal of Economics and Management Strategy, Jun 1, 2002
Central to so many accounts of postwar Japan, the keiretsu corporate groups have never had econom... more Central to so many accounts of postwar Japan, the keiretsu corporate groups have never had economic substance. Conceived by Marxists committed to locating "domination" by "monopoly capital," they found an early audience among western scholars searching for evidence of culture-specific group behavior in Japan. By the 1990s, they had moved into mainstream economic studies, and keiretsu dummies appeared in virtually all econometric regressions of Japanese industrial or corporate structure. Yet the keiretsu began as a figment of the academic imagination, and they remain that today. The most commonly used keiretsu roster first groups large financial institutions by their prewar antecedents. It then assigns firms to a group if the sum of its loans from those institutions exceeds the amount it borrows from the next largest lender. Other rosters start by asking whether firm presidents meet occasionally with other presidents for lunch. Regardless of the definition used, cross-shareholdings were t rivial even during the years when keiretsu ties were supposedly strongest, and membership has only badly proxied for "main bank" ties. Econometric studies basing "keiretsu dummies" on these rosters have produced predictably haphazard results: some are a function of misspecified equations, while others depend on outlying data points and some are specific to one keiretsu roster but not others. The only reliably robust results are the artifacts of the sample biases created by the definitions themselves.
Change is in the air in Japan, claim many observers: the government is radically deregulating cru... more Change is in the air in Japan, claim many observers: the government is radically deregulating crucial sectors of the economy, the large firms are unwinding their keiretsu corporate groups, and firms and banks are dismantling their main bank arrangements. Some observers see all three as exogenous institutional shocks, while others treat the last two as behavioral responses to the first. In fact, although the first phenomenon would constitute an institutional change if it occurred, it has not-for Japanese bureaucrats had no substantial regulatory power to abandon. Although the last two would constitute market responses if they occurred, they have not either-for firms and banks maintained no groups or main-bank arrangements to unwind or dismantle.
Most of what we collectively think we know about the Japanese economy is urban legend. In fact-* ... more Most of what we collectively think we know about the Japanese economy is urban legend. In fact-* The keiretsu do not exist, and never did. An entrepreneurial "research institute" in the 1950s created the rosters to sell to Marxist economists looking for the "monopoly capital" that their theory told them would dominate their "bourgeois capitalist" world. Western scholars hoping for examples of culture-specific forms of economic organization then brought them back to the U.S. * The zaibatsu did not succeed prewar because they bought politicians, exploited the poor, or manipulated disfunctional capital markets. They succeeded for all the usual varied reasons a few firms succeed in any modern economy. They acquired the (perjorative) zaibatsu label because they happened to be thriving when muckraking journalists in the 1920s and 30s came looking for someone to blame for the depression. * Japanese firms have no "main bank system," and never did. Economists popularized the idea as an anecdote on which to peg their mathetical models, and non-economists use it (like the keiretsu) as yet another putatively culture-bound economic phenomenon. * Japanese firms are neither short of outside directors nor badly governed. The charges simply represent yet another variant on populist journalism. Like firms in other competitive capitalist countries, Japanese firms survive only if they adopt governance mechanisms appropriate to the markets within which they must compete. * The Japanese government never seriously guided or intervened in the Japanese economy. When the economy boomed, politicians and bureaucrats did take credit. They had created the success through their own faresighted leadership, they claimed. Marxist scholars dominated Japanese social science departments, and they were not about to suggest instead that market competition might account for the success. Happy as they were to find an example of successful government intervention, neither were most Western scholars of Japan.
We gratefully acknowledge the generous financial assistance of the Sloan Foundation (Miwa and Ram... more We gratefully acknowledge the generous financial assistance of the Sloan Foundation (Miwa and Ramseyer) and the John M. Olin Center for Law, Eco nomics & Business at the Harvard Law School (Ramseyer). We thank the many officials of various suppliers who permitted and facilitated Miwa's interviews and on-site visits.
As of June 1, 2015, the Tokyo Stock Exchange mandated a "corporate governance code" on ... more As of June 1, 2015, the Tokyo Stock Exchange mandated a "corporate governance code" on firms that would list their stock on its exchange. In effective, the code required most listed firms to appoint outside directors to their boards. The code itself was the output of a study committee organized under the auspices of the Financial Service Agency and the Exchange. And it had as its formal impetus the 2014 amendments to the Corporate Code that increased pressure on firms to appoint outside directors. The mandates trace their origins to debates within other countries over corporate governance, and to the on-going political disputes over reviving Japanese economic growth. In this article, we explore four questions relating to the mandate: (a) what do the outside director mandates actually require, (b) who actually decides the substance of the mandate, (c) what process resulted in the mandate, and (4) what relation does the mandate bear to economic theory and empirical research?...
We gratefully acknowledge the generous financial assistance of the Sloan Foundation (Miwa and Ram... more We gratefully acknowledge the generous financial assistance of the Sloan Foundation (Miwa and Ramseyer) and the John M. Olin Center for Law, Eco nomics & Business at the Harvard Law School (Ramseyer). We thank the many officials of various suppliers who permitted and facilitated Miwa's interviews and on-site visits.
For Western economists and journalists, the most distinctive facet of the post-war Japanese busin... more For Western economists and journalists, the most distinctive facet of the post-war Japanese business world has been the keiretsu, or the insular business alliances among powerful corporations. Within keiretsu groups, argue these observers, firms preferentially trade, lend money, take and receive technical and financial assistance, and cement their ties through cross-shareholding agreements. In "The Fable of the Keiretsu", Yoshiro Miwa and J. Mark Ramseyer demonstrate that all this talk is really just urban legend. In their insightful analysis, the authors show that the very idea of the keiretsu was created and propagated by Marxist scholars in post-war Japan. Western scholars merely repatriated the legend to show the culturally contingent nature of modern economic analysis. Laying waste to the notion of keiretsu, the authors debunk several related "facts" as well: that Japanese firms maintain special arrangements with a "main bank," that firms are systematically poorly managed, and that the Japanese government guided post-war growth. In demolishing these long-held assumptions, they offer one of the few reliable chronicles of the realities of Japanese business.
The Japanese "main bank system" figures prominently in the recent literature on "relationship ban... more The Japanese "main bank system" figures prominently in the recent literature on "relationship banking." By most accounts, the main bank epitomizes relationship finance: traditionally, every large Japanese firm had one, and that bank monitored the firm, participated in its governance, acted as the delegated monitor for other creditors, and rescued the firm if it fell into financial distress. Yet all this has begun to change, continue these accounts. Japan deregulated its financial markets in the 1980s, and many firms abandoned their relational lender for market finance. As the main banks then lost their ability to the constrain firms-as relationship banking unraveled-the firms gambled in the stock and real estate bubbles, the bubbles burst, and the firms threw the country into recession. Using financial and governance data from 1980 through 1994, we show that none of this is true. The accounts of the Japanese main bank instead represent fables, stories we collectively recite because they so conveniently illustrate the theories and models we hope to develop. Whether during the 1980s boom or the 1990s recession, they bore no resemblance to any aspect of Japanese corporate finance or governance.
Economists and legal scholars routinely posit an implicit contract between Japanese firms and the... more Economists and legal scholars routinely posit an implicit contract between Japanese firms and their principal lender (called their "main bank"). Under this arrangement, the bank implicitly agrees to rescue the firm (through financial and managerial help) when times turn bad. Out of court, it rescues the firm from insolvency. Not only does it save the investments specific to the troubled firm, it lowers the use of costly bankruptcy proceedings and cuts the costs of those bankruptcy procedures it does occasionally invoke. Given the creditor-shareholder conflicts of interest that arise as firms approach insolvency, such arrangements would seem unstable. Yet according to a long sociological tradition, conflicts of interest are inherently less problematic in Japan than in the West. According to the emerging economic and legal tradition, Japanese economic actors do face those conflicts, but keep them in check through reputational concerns, close-knit ties, and government supervision. Using two datasets of troubled firms from the 1970s and 1980s, we ask whether Japanese main banks in fact rescue distressed borrowers. We find no evidence that they do: large Japanese firms fail; when large firms approach insolvency main banks do not increase the share of the firm's debt they bear; stronger ties between distressed firms and their main bank do not facilitate loans; and troubled firms do not try to preserve their main bank relationship. Instead, the claim that Japanese banks implicitly agree to rescue firms is sheer myth. Conflicts of interest do indeed matter in Japan-and they matter enough to prevent precisely the incentiveincompatible rescue deals that scholars in the field so routinely posit.
Observers of modern transitional economies urge firms there to ignore stock markets. Stock market... more Observers of modern transitional economies urge firms there to ignore stock markets. Stock markets simply will not work in such environments, they explain. Firms should instead rely on debt finance, particularly bank debt. Only then will they be able to keep principal-agent (i.e., investor-manager) slack to manageable levels. Turn-of-the-century Japanese firms faced problems that closely mirrored those in modern eastern Europe. Yet in Japan, the successful large firms did not rely on debt. Instead, they raised their funds through the stock market, and took a variety of steps to mitigate the principal-agent slack involved. As one of those steps, they recruited prominent investors to their boards. Using data on firms in the cotton-spinning industry (arguably the most important industrial sector in turn-of-the-century Japan), we explore why the firms recruited prominent directors. First, we note that firms with such directors had higher profits than others. In part, they probably had higher profits because such investors had an eye for firms that would likely succeed. In part too, however, they seem to have had higher profits because those investors brought basic management skills-they knew how to monitor and when to intervene. Second, prominence held constant, we find that firms did not have higher profits by having directors affiliated with a bank or with other spinning firms. One might have thought directors with access to a bank or spinning technology would raise profits at a firm. In fact, they did not, for banks did not have the funds to lend, and the technolgy was freely available. Last, we explore whether the directors certified firm quality on behalf of other investors. Although firms with prominent directors apparently did have an advantage in the capital market, we conclude that quality certification was at most a by-product (if even that) of the monitoring and intervention these directors performed.
Economists and legal scholars routinely posit an implicit contract between Japanese firms and the... more Economists and legal scholars routinely posit an implicit contract between Japanese firms and their principal lender (called their "main bank"). Under this arrangement, the bank implicitly agrees to rescue the firm (through financial and managerial help) when times turn bad. Out of court, it rescues the firm from insolvency. Not only does it save the investments specific to the troubled firm, it lowers the use of costly bankruptcy proceedings and cuts the costs of those bankruptcy procedures firms do occasionally invoke. Given the creditor-shareholder conflicts of interest that arise as firms approach insolvency, such arrangements would seem unstable. Yet according to a long sociological tradition, conflicts of interest matter less in Japan than in the West. According to the emerging economic and legal tradition, Japanese economic actors do face those conflicts, but keep them in check through reputational concerns, close-knit ties, and government supervision.
Many Americans picture the Allied (i.e., U.S.) Occupation of Japan (1945-52) as the quintessentia... more Many Americans picture the Allied (i.e., U.S.) Occupation of Japan (1945-52) as the quintessentially good occupation: elaborately planned in advance, idealistically administered until derailed by anti-Communist indeologues in its later years, it laid the foundation for Japan's postWar democracy and prosperity. In fact, the Americans-especially those Americans celebrated as most "idealist"-did not plan a Japanese recovery, and for the first several years did not work for one. Instead, they mostly just planned retribution: whom to hang, and which firms to shutter. Economic issues they entrusted to Japanese bureaucrats, and those bureaucrats merely manipulated the controls they had used to disastrous effect during the War. Coming from a New Deal background in Washington, the Americans enthusiastically urged them on. Although the Japanese economy did grow, it did not grow because of the Occupation. It grew in spite of it. In early 1949, Japanese voters overwhelmingly rejected the political parties offering economic controls. In their stead, they elected center-right politicians offering a non-interventionist platform. These politicians then dismantled the controls, and (despite strong opposition from New Deal bureaucrats in the Occupation) imposed a largely non-interventionist framework. As a result of that choice-and not as result of anything the Occupation did-the Japanese economy grew.
Journal of Economics and Management Strategy, Jun 1, 2002
Central to so many accounts of postwar Japan, the keiretsu corporate groups have never had econom... more Central to so many accounts of postwar Japan, the keiretsu corporate groups have never had economic substance. Conceived by Marxists committed to locating "domination" by "monopoly capital," they found an early audience among western scholars searching for evidence of culture-specific group behavior in Japan. By the 1990s, they had moved into mainstream economic studies, and keiretsu dummies appeared in virtually all econometric regressions of Japanese industrial or corporate structure. Yet the keiretsu began as a figment of the academic imagination, and they remain that today. The most commonly used keiretsu roster first groups large financial institutions by their prewar antecedents. It then assigns firms to a group if the sum of its loans from those institutions exceeds the amount it borrows from the next largest lender. Other rosters start by asking whether firm presidents meet occasionally with other presidents for lunch. Regardless of the definition used, cross-shareholdings were t rivial even during the years when keiretsu ties were supposedly strongest, and membership has only badly proxied for "main bank" ties. Econometric studies basing "keiretsu dummies" on these rosters have produced predictably haphazard results: some are a function of misspecified equations, while others depend on outlying data points and some are specific to one keiretsu roster but not others. The only reliably robust results are the artifacts of the sample biases created by the definitions themselves.
Change is in the air in Japan, claim many observers: the government is radically deregulating cru... more Change is in the air in Japan, claim many observers: the government is radically deregulating crucial sectors of the economy, the large firms are unwinding their keiretsu corporate groups, and firms and banks are dismantling their main bank arrangements. Some observers see all three as exogenous institutional shocks, while others treat the last two as behavioral responses to the first. In fact, although the first phenomenon would constitute an institutional change if it occurred, it has not-for Japanese bureaucrats had no substantial regulatory power to abandon. Although the last two would constitute market responses if they occurred, they have not either-for firms and banks maintained no groups or main-bank arrangements to unwind or dismantle.
Most of what we collectively think we know about the Japanese economy is urban legend. In fact-* ... more Most of what we collectively think we know about the Japanese economy is urban legend. In fact-* The keiretsu do not exist, and never did. An entrepreneurial "research institute" in the 1950s created the rosters to sell to Marxist economists looking for the "monopoly capital" that their theory told them would dominate their "bourgeois capitalist" world. Western scholars hoping for examples of culture-specific forms of economic organization then brought them back to the U.S. * The zaibatsu did not succeed prewar because they bought politicians, exploited the poor, or manipulated disfunctional capital markets. They succeeded for all the usual varied reasons a few firms succeed in any modern economy. They acquired the (perjorative) zaibatsu label because they happened to be thriving when muckraking journalists in the 1920s and 30s came looking for someone to blame for the depression. * Japanese firms have no "main bank system," and never did. Economists popularized the idea as an anecdote on which to peg their mathetical models, and non-economists use it (like the keiretsu) as yet another putatively culture-bound economic phenomenon. * Japanese firms are neither short of outside directors nor badly governed. The charges simply represent yet another variant on populist journalism. Like firms in other competitive capitalist countries, Japanese firms survive only if they adopt governance mechanisms appropriate to the markets within which they must compete. * The Japanese government never seriously guided or intervened in the Japanese economy. When the economy boomed, politicians and bureaucrats did take credit. They had created the success through their own faresighted leadership, they claimed. Marxist scholars dominated Japanese social science departments, and they were not about to suggest instead that market competition might account for the success. Happy as they were to find an example of successful government intervention, neither were most Western scholars of Japan.
We gratefully acknowledge the generous financial assistance of the Sloan Foundation (Miwa and Ram... more We gratefully acknowledge the generous financial assistance of the Sloan Foundation (Miwa and Ramseyer) and the John M. Olin Center for Law, Eco nomics & Business at the Harvard Law School (Ramseyer). We thank the many officials of various suppliers who permitted and facilitated Miwa's interviews and on-site visits.
As of June 1, 2015, the Tokyo Stock Exchange mandated a "corporate governance code" on ... more As of June 1, 2015, the Tokyo Stock Exchange mandated a "corporate governance code" on firms that would list their stock on its exchange. In effective, the code required most listed firms to appoint outside directors to their boards. The code itself was the output of a study committee organized under the auspices of the Financial Service Agency and the Exchange. And it had as its formal impetus the 2014 amendments to the Corporate Code that increased pressure on firms to appoint outside directors. The mandates trace their origins to debates within other countries over corporate governance, and to the on-going political disputes over reviving Japanese economic growth. In this article, we explore four questions relating to the mandate: (a) what do the outside director mandates actually require, (b) who actually decides the substance of the mandate, (c) what process resulted in the mandate, and (4) what relation does the mandate bear to economic theory and empirical research?...
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Papers by Yoshiro Miwa