The Fable of the Keiretsu: Urban Legends of the Japanese Economy

Asia Pacific Journal of Management, 2008

DOI: 10.13140/2.1.2414.5281

During the Meiji Era, Japanese leaders studied important institutions in Europe and adapted them to their local environment in their effort to modernize. Keidanren, a peak employers’ association under which industry associations – from sector specific to product specific – are organized, and Japan External Trade Organization (JETRO), an agency that promotes trade with Japan, are two such adapted institutions. The evolution of these and other business institutions, despite the central role they play, has enjoyed relatively little academic scrutiny. This may be partly due to the neoclassical view that when business people meet their sole purpose is to collude. Have these business institutions become anachronistic icons? In both Japan and Europe, business institutions are playing a central role pushing for the negotiation of a Japan-EU free trade agreement. Such an agreement would require the dismantling of many accepted business practices and norms and usher in a new phase of institutional adjustment.

1998

Although sometimes said to reflect distinctively Japanese modes of economic organization or the general importance of path-dependence and culture, the cross-shareholding patterns within the Japanese keiretsu often display a straightforward economic logic. When keiretsu banks trade on debtor stock, for example, they occasionally seem to be capturing gains from inside information. When manufacturers in the automobile industry buy stock in their suppliers, they apparently do so to protect relationship-specific investments. And when the pre-war predecessors to the keiretsu invested in component firms, they often invested in ways that resembled the ways silicon valley venture capitalists invest today. Economic form may differ between the U.S. and Japan, but the cross-shareholdings themselves reflect a simple economic rationale.

2005

Journal of the Japanese and International Economies, 1996

Why do large firms in Japan hold small percentages of stock in trading partners? A firm that holds stock in a trading partner weakens its own bargaining position, for a portion of its own gain from trade then includes a share interest in the partner's gain from trade. But precisely for this reason the firm can at any time penalize the trading partner by divesting its share interest. Cross-shareholding therefore strengthens the penalties for opportunism and this may be its purpose. Opportunism here means substituting products of lower quality than claimed or misrepresenting investments that lower the other party's costs. Econometric analysis of the pattern of cross-shareholding within Japan's keiretsu groups in 1980 reveals evidence that is consistent with this argument. (J.E.L. classifications: D23, G30, L14) I thank Nanzan University for permission to use its Nikkei financial data tape for this project. Also, for comments on earlier drafts of this paper I thank Karen Chen, Chuck Knoeber, Steve Margolis, Tatsuhiko Nariu, and Hoan-Jae Park. THE KEIRETSU PUZZLE 1. Introduction, One of the most puzzling features of Japanese business is the prevalence of small shareholding ties (5% of stock or less) between large firms that are trading partners. These shareholding ties are most prominent in the keiretsu, the six major business groups that include most of the largest companies in Japan. 1 For instance 27.4% of the outstanding shares of the 25 companies that were affiliated with the presidents' club of the Mitsubishi group in 1988 were held inside the same group. The average stockholding of each of the 21 nonfinancial members of the presidents' club in each of the others was about 1% in 1980. 2 Similar statements could be made about the presidents' clubs of the Mitsui, Fuyo, Sumitomo, Sanwa, and Dai-Ichi Kangyo keiretsu.

Journal of Banking & Finance, 2009

2011

In several fields, modern academics trumpet the contingency of social science and the indeterminacy of institutional structures. The Japanese experience during the first half of the 20th century, however, instead tracks what much-derided chauvinists have claimed all along: modern legal institutions largely trump indigenous organizational frameworks, and modern rational-choice theory nicely predicts how people respond to such institutions. As orientalist as it may seem, such theory goes a long way toward explaining the real world in which we live. Prepared for a conference on the rule of law in Asia, UCLA School of Law, January 2001.

Contemporary Japan, 2017

Business Horizons, 1981

Enterprise and Society, 2006

Culture and Institutions in the Economic Growth of Japan, 2020

It has become well known that Japan experienced sustained economic growth before the Meiji Restoration in 1868. During the early modern Tokugawa era, the Japanese economy grew at an annual rate of 0.51% from 1600 to 1721 and 0.33% from 1721 to 1874 (Takashima 2017), comparable to the rate of growth of 0.41% of 12 Western Europe countries during the period 1500-1820 (Maddison 2007). It is important to note that Japan's growth was attained under conditions of self-imposed isolation. In other words, Japan's growth was purely domestic and hence an endogenous phenomenon, whereas the growth of the Occident owed much to the exogenous impacts on the expansion of foreign trade as a result of geographical discoveries and the development of new trade routes after around 1500. This book investigates the mechanism of the endogenous growth of Tokugawa Japan from socioeconomic history since the thirteenth century and deliberates about its impacts on the economy after the Meiji Restoration. It will be shown that the moderate but sustained growth for more than two centuries during the Tokugawa era was caused by the development of domestic commerce owing to the alleviation of information asymmetry and, hence, as a result of a decline in transaction costs. Behind the changes in transaction costs were dynamic changes in trust levels in society during the fourteenth through the eighteenth century and its interactions with another major cultural trait based on Buddhism activism, the kyūdō (true-way pursuing) principle, and the stabilizing influence of Shintoism. Although the influence of religions had already significantly weakened in the modern Japan, the cultural traits of religious origin had been embedded deeply in the socioeconomic system of Japan. The evolution of the socioeconomic and political system after the Meiji Restoration was subject to the strong influence of cultural traits nurtured during the thirteenth century through the Tokugawa era. The level of trust in society as well as the role played by the kyūdō principle underwent dynamic changes in the long-term history of Japan. Trust that had been nurtured in the homogeneous society during the ancient era deteriorated as the centralized and nationalized economic system, the ritsuryō (law and order) system, declined,

1998

Critical Sociology, 2020

How can we understand the trajectory of Japanese capitalism? This Afterword situates Japan on a broad canvas stretching across both the region and the globe. East Asia’s regional dynamics figure prominently, shaping the trajectory of Japanese capitalism not only in the formative Age of Empire and postwar reconstruction, but also in the emergent Asian Century. An historical examination of geo-politics highlights imperial entanglements and both the routes and the roots of capitalist development in Japan. This discussion begins by setting the stage of post-World War II Japan, elaborating on the reproductive bargain that characterizes Japan’s political economy, investigating the importance of national identity as it informs who can participate in Japan’s economy, revealing the underbelly of contemporary Japan, discussing forces for change, and revisiting the methodological approach used to understand Japanese capitalism.

Pacific Affairs, 2018

Asia Pacific Business Review, 2010