Evaluate the economic strengths and weaknesses of Japanese

The Japanese Keiretsu has kept on growing, there are many definitions of what a Keiretsu are and how they actually operate. Keiretsu’s can be understood by ‘financial Keiretsu’ this one of their meanings. The so-called financial Keiretsu correspond roughly to the post war descendants of the pre-war Zaibatsu groupings. The largest six groups are Mitsui, Mitsubishi, Fiji, Sumitomo, Sanwa and Dai-ichi Kangyo. While some smaller groups exist which are called financial Keiretsu. The term Keiretsu actually refers to the importance of ‘networking’ which is in principle of organizing the economic life in Japan. Networking takes the form of a group of firms associated with the same ‘main bank’, a trading company. The definition of the pre-war Zaibatsu is closely linked to Keiretsu groups but the Zaibatsu were destroyed by forces such as the USA 1946-1947. The principle distinction is that Zaibatsu were closely held conglomerates run by wealthy families and with member firms often existing as formal subsidiaries. On the other hand Keiretsu members are legal entities which issue their own shares.

The connection of member firms to the ‘main bank’ is more tenuous than under the Zaibatsu form of organization. Sheard (1989), Morck and Nakamira (1992), Flath (1991) and others stress the role of the main bank as monitors, especially when other forms of monitoring may be weak. Even though banks are prohibited from holding more than 5% of the outstanding shares of any one company (10% in the event of financial distress), they are nevertheless very important, shareholders within a Keiretsu. Cross holdings of shares by member firms is another distinction of Keiretsu. Aoki (1986) argues cross-holding of shares effectively insulates member firms from hostile takeover.

The Keiretsu is a key feature of the Japanese economy, directly or indirectly affecting economic transactions within and across the industry. Keiretsu’s can be categorized as two types, firstly there is a Horizontal Keiretsu these are associated with large corporations and are organized around a main bank, a city bank, trust bank, real estate agency, life and casualty insurance firm and one or more trading companies. E.g. Mitsubishi. Keiretsu’s only contained a single firm from each industry, to promote, by mutual assistance and preferred transactions, interests of its members. But there are exceptions with Dai-ichi Kangyo, Sanwa and Fuyo. The firms will sponsor the Keiretsu’s products if they charge them a reasonable price which is not higher than the outsiders.

Keiretsu’s are distinguished by cross holding of shares; companies hold shares of member firms. These are acquired less for ordinary commercial motives than for considerations of mutual solidarity. Such investments serve to ward off non-group predators. This leads to companies to measure long-term security and freedom from outside control, which then leads to a better management of implicit lifetime employment contracts.

The second is Vertical Keiretsu these organized around a large independent company and its subsidiaries and affiliates. However, one of the prime forces underlying these formations is that in contrast to most western firms, leading Japanese corporations tend to undertake less in-house activity, preferring instead to have relatively larger bulk of their components tailor made by others. E.g. in 1979 and 1983, the proportionate value of total automobile manufacturing costs derived from a firm’s own activities was 26% for Nissan and 28% for Toyota.

By several measures, despite press reports in the contrary, Keiretsu ties appear to have strengthened somewhat rather than weakened in recent years. E.g. the ratio of cross-shareholding for the six Keiretsu groups rose from 43.3% in JFY 1992. In 1992, the intragroup transactions involve the trading companies, according to the JFTC. With ties tens of thousands of Japanese companies, including Keiretsu, the trading companies play a significant role in Japan’s exports and imports, including domestic distribution activities. They are essentially gate keepers for Japan’s economy. The trading companies, along with the banks and insurance companies, provide both horizontal and vertical leadership and integrating functions to the Keiretsu. They provide key services to Japanese firms operating overseas, including those in Asia, and facilitate trade between third-party countries. By maintaining strong linkages between firms, the trading companies serve important intermediaries among local suppliers, parent companies, and customers in Japan.

Companies belonging to a Keiretsu have benefited from the occasional pooling of capital, technological knowledge, personnel, office space and recreational facilities. This has proved to be particularly useful when member firms have entered into joint ventures with each other, for by dealing with fellow Keiretsu firms, one starts off on the basis of long held associations which facilitate negotiations and cooperation. Information can be freely exchanged with full confidence. Loans can be readily be arranged through the group’s main bank and other financial institutions, and the Keiretsu’s major trading company can be called upon for assistance in distribution and the acquisition of imported inputs.

On average horizontal Keiretsu firms appear to be not profitable than non- Keiretsu ones. Odagiri 1992 ‘hardly any benefit seems to accrue from grouping’. Profit measurement in Japan has not been adequate enough for indication of the firm’s performance. Some people think that Keiretsu groups lead to monopolistic powers which try to maximize utility of corporate employees and not profits. One advantage of Keiretsu membership lies in greater degree of security which is protected by the Keiretsu’s main bank. This advantage extends to the economy at large, in that it enables Japan to adjust better to variable market conditions than most other industrial counties seem to be capable of doing. But this implies that less reliance on Keiretsu banks leads to a general weakening of Keiretsu links.

The cross-holding of shares among Keiretsu firms has come under criticism by foreign firms and governments in recent years which are excluding shareholders from outside the Keiretsu groups. The cross-holding of shares resembles self management for Keiretsu firms because it allows them to concentrate on what they are good at – engaging in R&D activities, planning for efficient production and distribution and new markets, by minimizing outside intervention of other stakeholders in the running of their business.

Japanese companies and their workers are intensely aware of the standing of their own firm in its industry. They loathe to be left out of the race. So there is pressure from divisions of companies affected by a new trend within an industry to get in early on new products. Printing companies have rushed to make electronic circuit boards; drug and chemical firms. Also food firms have started research on biotechnology; while every firm with its own plant engineering department, from car companies to small firms making pens, has begun to tinker with making and applying industrial robots. The same instincts in the electric appliance industry led to the rush to put microchips in every product. This ensures, first that the Japanese are unlikely to ignore a new industry, second, that competition in it will be intense, the drop out rate is high, but that, third, several world companies emerge.

Competition could not have produced such powerful companies in so wide a range of industries unless each firm determined to stay ahead in the same race, instead of shifting to another business. Japanese companies remain specialised for two quite different reasons. They cannot merge or takeover companies which are doing well in other industries because shares in companies are not treated like financials assets as they are in Britain or the U.S. So conglomerate companies are unheard of.

The inability to diversify by takeover, and the stress in Japanese companies on ensuring the survival of the community within them rather than maximizing shareholders’ returns, forces a powerful discipline on each firm. It must compete and survive in its own field. That has given managers two main aims. One is to ensure profitability, but mainly on operations not on assets or capital employed. The other aim is to anticipate the end of the useful life of one successful product by developing its successors.

The potential behavioural differences between affiliated and independent firms in Japan were explored. The primary behavioural implication of interest was that of potentially more risk-averse behaviour on the part of managers of affiliated firms. That is, on of the functions of group affiliation often cited in the literature is the insulation of mangers from hostile takeover. To the extent that such managers are risk averse, this insulating effect is supposed to allow for more stable management of the firm. However, those arguments are problematic because affiliation is so widespread in Japan. It, therefore, becomes difficult to clearly identify affiliated versus independent firms. If this is true the performance of affiliated firms is more stable, but dampened relative to that of independent firms.

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