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What are the major characteristics and functions of the Japanese keiretsu (系列) ?


I. Introduction


This paper examines the major characteristics and functions of Japanese corporate alliance (keiretsu). It will also make an effort to answer to the question about changes which have affected keiretsu.

First, this essay will present the formation of keiretsu during the post-war period in Japan. Second, it will be describe the structure and main characteristics of keiretsu as the Japanese type of corporate alliance.

Finally, it will present factors which have influenced the change of activity of keiretsu and how these changes have affected keiretsu.


II. Birth of keiretsu

            It is widely accepted that the formation of enterprise groups called keiretsu was established in Japan after the Second World War. On the other hand some authors indicate that the roots of above-mentioned groups were in the Meiji period. After the Japan had broken with the two century policy of isolation, the young Meji government created the initial infrastructure for future industrialization. Moreover, it was actively involved in establishing and expanding companies. The result of this policy was the creation of a zaibatsu (Kensy, 2001: 208-209). The Zaibatsu were family run enterprise groups. Morikawa (2002: xvii) defines zaibatsu “as a group of diversified business owned exclusively by a single family or an extended family”. Zaibatsu companies started to develop themselves very quickly because they obtained a lot of subsidies and contracts from Meiji government.

The first zaibatsu to be created was Mitsui which was established in 1876. The next three established zaibatsu were: Mitsubishi, Sumitomo and Yasuda. Mitsubishi was concentrated on shipbuilding and heavy industry, and was a major player in mining, shipping, trade, brewing, insurance, and banking. Sumitomo activity was focused on banking but also on mining and metals. Yasuda zaibatsu became to specialized in finance; controlling an important bank, a major trust bank and two large insurance firms. These four zaibatsu were called the Big Four. They expanded their financial business, also establishing insurance companies and trust banks (Miyashita and Russel, 1994: 25-27).

The individual zaibatsu had a monopoly in one or two industries but soon the whole Japanese economy was divided up between them. By the end of the First World War, each zaibatsu had launched at least one major manufacturing company in each sector and controlled, respectively, a bank, an insurance company, a shipping line and trading company. In 1930, approximately 75% of Japan’s Gross Domestic Product was directly or indirectly controlled by the largest zaibatsu (Kensy, 2001: 210).

After Japan’s collapse in the Second World War the American occupational forces decided to dissolve the zaibatsu as the source of Japanese military power. They intended to destroy the economic base of the Japanese military and prevent monopolistic market concentrations. As a result it was planned to sell shares to the public and dissolve the zaibatsu into countless smaller companies (Baum, 1994). In 1947 Antimonopoly Law came into effect. The new law made holdings companies illegal (Miyashita and Russel, 1994: 33).

In 1948 the global political situation began to change. In Europe the cold war started and Communism began to spread in Europe and Asia. By 1948, the United States began to see Japan as a strategic buffer between the United States and the Communist countries. The United States needed a strong Japan with a strong economy rather than a weak Japan (Miyashita and Russel, 1994: 34). The process of the dissolution of the zaibatsu was stopped. Many of them were re-established. The originally forbidden practice of using the old zaibatsu names in the names of new companies was now accepted (Morikawa, 2002: 238).  This time, companies grouped around the banks were allowed to hold shares in other companies, which made the establishment of financial links easier. They quickly achieved economic parity with the classic zaibatsu.  These conglomerates were now called keiretsu. Some emerged out of former zaibatsu but others were just new groupings of companies (Baum, 1994). The new keiretsu companies lacked parent corporations operating as holding companies, the influence of family, common in a zaibatsu, disappeared, and member companies were independent (Kikkawa, 1995: 45).


III.    The organization and functions of keiretsu

The names of the six biggest keiretsu are: Mitsubishi, Sumitomo, Mitsui, Fuyo, Sanwa, and Daiichi-Kangin.  According to Shimotani (1995:54) a keiretsu can be defined as “the close, long- term business relationships established by large corporations with select groups of smaller firms, and they are linked through investment and the exchange of personnel”.

The most common way of classification a keiretsu which occurred in the literature is horizontal keiretsu and vertical keiretsu.


1.         Horizontal keiretsu

A horizontal keiretsu is a group of very large companies which are independent and operate in different industries. The Mitsubishi Group of companies would be one example. As mentioned above many independent companies exist in horizontal keiretsu. There is no holding company which directs the activities of the group. On the other hand there is a bank, which together with trading company, acts as the linchpin of the group (Yoshihara, 1994: 154). Around them there are the core members, usually three firms: A life insurance company, a non-life insurance company, a trust bank and one or two very large manufacturers. Together the financial firms, the trading company and the key manufacturers give the keiretsu its identity (Miyashita and Russel, 1994: 10).

The important feature of vertical keiretsu is the companies in the same group want to do business together so it is difficult for outsiders to break in, especially if they have to compete with companies in the group. The companies in the group are independent but usually they operate as one “body”.

Inside the horizontal keiretsu the key role is played by the bank. Gerlach (1992: 114) notices that the central role during the pre-war period in capital allocation among a zaibatsu was played by the holding company. During the postwar period, with the dissolution of the holding companies, this role was taken over by large city banks as major lenders of capital. Yoshihara (1994: 155) explains that “the bank does not lend all the money the company requires, but provides the largest amount and acts as a sort of guarantor for the other banks which lend money to the company”. Thus, Japanese big companies have good access to financial sources. There is a close relationship between companies in the group and bank. The group usually has a bank that is the largest lender but also has important shareholders of other companies in the group. Thus, debt-holders are often shareholders at the same time. This network of mutual shareholding is characteristic in the keiretsu and is often called “cross-shareholding” (Hoshi, 1994: 288). It happened very often that a group of affiliated firms issued shares and assigned them to member firms in order to protect firms against take over by foreign competitors.

As was pointed out the second important element in horizontal keiretsu is the trading company. It has the vital role in a horizontal keiretsu of coordinating trade, not only within the group, but also among different groups and even with foreign companies (Miyashita and Russel, 1994: 43).


2.         Vertical keiretsu

A vertical keiretsu is formed by one very large company (assembler) and hundreds or thousands of small companies (suppliers). The vertical keiretsu usually occurred in automotive industry in Japan. A good example would be a large company like Toyota. The vertical keiretsu is also common in the electronics, although many other fields have its own vertical keiretsu, including advertising, publishing, broadcasting, and other non-manufacturing businesses (Miyashita and Russel, 1994: 12).

It is important that the shape of the vertical keiretsu is a pyramid. In the case of  an automotive manufacturer, a few tiers of suppliers are involved: the first tier of companies supplies the car assembler, the second tier works for the first tier, the third tier for the second, and the process is continued downward (Yoshihara, 1994: 156). In other words at the top of the pyramid there is the most important company (assembler) and at the bottom there are hundreds or thousands of companies (suppliers). It is common that the smallest companies at the bottom of the pyramid do not even know that they work for the world famous assembler. On the other hand the parent company has no idea how far down its pyramid extends. It can see only two or three pyramid’s level down.

Yoshihara (1994: 157) notices that unlike horizontal keiretsu, power relations are unequal in vertical keiretsu. The assembler has much more power than its suppliers. The assembler posses the option of terminating relations, while its suppliers can leave the keiretsu and join new keiretsu. Many suppliers also depend on the assembler for capital, technology, management know-how and manpower. According to Baum (1994) the companies in vertical keiretsu behave like one organism: giving loans, technology, development costs and long-term supply agreements from customers higher up in the pyramid to subcontractors.


In a keiretsu the important role is played also by the presidents’ club. The member companies of the presidents’ club come from six large enterprises groups. There are large banking, finance, trading, real estate, and manufacturing corporations. Nakata (1998: 138) explains that the purpose of the club is to share information on economic conditions and other business matters. The exchange of opinions between company presidents is often carried out in order to establish new enterprises and high-level personnel matters in member companies. The presidents’ club does not influence directly on decision process in member companies but fulfils an important role in decision-making related to the interests of the enterprise group.


3.         The functions of keiretsu   

There are several functions of a keiretsu which decided that it has a big advantage over other competitors and contributed to the big success of Japanese group companies on the world market. Some authors argue that the one of the most important function of a keiretsu is minimizing transaction cost (Shimotani, 1995:54). But according to Kensy (2001: 222) there are seven tasks performed by a keiretsu on behalf of the members of its group:

  • organization of overall business procedures,
  • risk-distribution function,
  • information function,
  • internal financial market functions
  • strategic group coordination functions,
  • symbolic functions,
  • forward-looking structural changes functions.


However, in this paper I will examine five of the most important of them:

3-1. Organization of overall business procedures

The one of the most important functions of a keiretsu is organizing the operational activities of all group members. This function covers all sectors of activities from marketing, logistics and distributions, transport, warehousing, insurance and outlet management to ancillary administrative services and other general organizational functions. Kensy (2001: 222) notices that an important role is played by the trading companies located in the structure of a keiretsu. The trading companies undertake the main portion of these organization functions. They serve to coordinate and generate supply and demand on the home market within a keiretsu. The organization function contributes mainly to cost savings, time savings, minimizing risk management and increasing strategic efficiency (Young, 1990, 60, quoted in Kensy, 2001, 222).


3-2.            Risk-distribution function

This is the most significant function of a keiretsu. The fundamental principle of a keiretsu is long-term agreements between group’s companies. Furthermore, the mutual business relationships are clearer because counter partners know each other.  It is also easier to plan long-term investments. Group’s companies hold the shares of other companies in the group. This makes it difficult for outsiders to take over a company in the group and thus gives management long-term stability (Yoshihara, 1994: 144).

Gerlach (1992: 22) also pointed out that “large companies have the broadest scale and scope of activities, and the resulting benefits of complementary coordination among these firms, their banks, trading companies, and other large industrial companies are greatest”. The companies involved in a keiretsu can better reduce risks across a diverse range of business lines than smaller and more focused companies. Furthermore, better risk management contributes to higher profits achieved by keiretsu companies.


3-3.      Information function

Fast access to information is crucial in modern business. A keiretsu provides fast access to daily updated information for their companies. The possession of relevant information gives a keiretsu a big advantage over its competitors. A keiretsu has access to information from the home market but also from overseas markets. They collect home market data and foreign data from keiretsu companies which operate abroad. Financial information comes from financial and trading links and is analyzed by the main bank.

The information sector is high developed in Japan. The Japanese keiretsu was the first to own satellites: Mitsubishi was the first company to launch a dedicated satellite into space, especially for internal purposes (Kensy, 2001:223). The Japanese are famous of its developing communication technology. The good development information system is a fundamental component in terms of a keiretsu’s success.


3-4.      Internal financial market functions

A keiretsu provides access to funds for group companies. As it was mentioned earlier a very important role is played by the bank inside a keiretsu. It does not only lend all the money the company requires, but also provides the largest amount and acts as a sort of guarantor for the other banks which lend money to the company. Kensy (2001: 225) mentioned that keiretsu also provide access to international money and capital markets which are difficult to achieve for individual, small and unknown member companies. This also reduces interest charges for smaller companies.


3-5.            Strategic group coordination functions

According to Kensy (2001: 226-227) a keiretsu plays an important role in management planning and as a general protector of group companies. A keiretsu provides protection against the competitive pressures and also against foreign market players. Kensy compares a keiretsu to an umbrella which shields smaller firms from excessive risks. It prevents speculators and hostile take-over. This is performed internally within a keiretsu by their financial institutions, which conduct management control and monitor company performance.


IV.    How and why keiretsu is changing now?

The financial crisis that broke out in Asia in the summer of 1997 has brought a big pressure on companies to change. In order to survive crisis keiretsu enterprises have begun to transform themselves. In a situation when the Japanese economy slowed down, the competitive advantages of the keiretsu was the barrier to cope with the crisis. Keiretsu banks found themselves with huge bad debts from group companies, inter-group purchasing became a barrier to cost reduction and loyal labour forces were viewed as a burden to struggling companies (Chen, 2004: 196-197).

The Government also implemented several reforms to stop slowing down the Japanese economy. Choi (1999: 8) explains that keiretsu companies have also been subject to the pressure of Japanese government which initiated reforms in order to revitalize the economy. The financial system reform was prepared by the government of Prime Minister Hashimoto in 1997. It covered all areas of the financial sector – banking, securities and insurance. The Financial System Reform Law was enacted which included the following points: legalization of the financial holding company, withdrawal of the full-deposit protection scheme and corporate accounting reform. The government also intended to accelerate financial restructuring by boosting foreign competition (Choi, 1999: 16). It was obvious that all the above-mentioned measures would influence on keiretsu performance. On the other hand, keiretsu companies began themselves to implement some reforms to stop the crisis mainly in the automotive and electronic industries.

The Financial System Reform Law and revision of the Anti-Monopoly Law lifted the ban on holding companies. As a result, companies could choose to establish holding companies, under which they could organize subsidiaries (Choi, 1999:17). The next reform was the withdrawal of the full-deposit protection scheme imposed on domestic bank mergers. Weaker banks were forced to find merger partners because depositors probably would withdraw funds from banks perceived to be at risk. The government also introduced a number of new corporate accounting reforms. It would make it difficult for parent companies to hid non-viable subsidiaries by concealing profits or losses.

The Japanese government also liberalized the four areas of foreign exchange operations: capital transactions, foreign direct investment, and the Tokyo offshore market.

The foreign banks could start to take over failed domestic banks. In this situation Japanese banks were forced to merge each other in order to successfully compete with powerful foreign banks (Choi, 1997: 18-19).

All reforms implemented by the government and the stagnation of the Japanese economy in the second half of 1990’s and at the beginning of 2000’s influenced on the gradual transformation of the keiretsu structure. It was especially vital in the relationship between a bank and keiretsu companies. It was less attractive for the banks to grant loans to companies with decreasing profitability and hold shares of these companies. On the other hand, keiretsu companies did not want to hold shares of member banks when they were not able to offer the previous level of support (Choi, 1997: 24). Companies started to seek funds on the liberalized capital market. This situation influenced on weaker relations between a bank and keiretsu companies. Thus, keiretsu companies became more vulnerable to take over by outsiders.  Choi (1997: 23) argues that “these factors have already brought significant changes to the existing incorporate relationship among keiretsu member firms and may eventually dissolve the keiretsu structure”.

Many keiretsu companies were also forced to implement some reforms to stop crisis and struggle with foreign competitors. Especially automotive and electronic companies introduced many cost-cutting reforms (Mayasoshi, 1998: 112). These reforms, mainly staff reduction, transferring of production overseas and a review of purchasing strategies, influenced on the bankruptcy of many domestic companies belonging to keiretsu groups.  Some of the subcontractors had to try to join another keiretsu group or become freelance. It resulted also in increasing the rate of unemployment. In 2001 the rate reached a level of 5%, the highest in post-war history of Japan (Watts, 2001). In many companies in order to cut costs it was common to increase number of part-time employees. It influenced on relationship between employers and employees. Many employers were not being able to guarantee lifetime employment. Therefore, employees were conscious of the fact that during their career they will have to change their work place one or more times.

Currently keiretsu faces another problem, the shortage of a well-educated labour force. This is also big problem for the Japanese economy. The fast decreasing birth rate will create a drop of numbers of workers. Japan probably will have to open its job market for immigrants and attract more foreign workers. In all of the post-war period Japan was a homogenous society. However, in the near future many foreigner workers especially blue-collars will join Japanese companies. Thus, it is an interesting aspect to see how it will influence on the structure and performance of keiretsu in near future.

V.      Conclusion


One outstanding feature of the Japanese economy is the dominance of large business groups – keiretsu. They influence not only the economy but also maintain close relationships with the government. Furthermore, keiretsu benefited from large governmental involvement in economic development of Japan (Chen, 2004: 139).

On the other hand the activity of the keiretsu in the post-war period was a success. In less than two decades the Japanese industry sector had developed the country by raising the national standard of living from poverty level to the one of highest in the world. And much of the credit for this growth goes to the government policy which promoted the keiretsu system (Miyashita and Russel, 1994: 194-195) and to keiretsu companies which were always the major players on Japanese market. 

The list of references




Baum, Joel A.C. (1994), Evolution of Keiretsu and Their Different Forms [online]. Available at: <URL www.rotman.utoronto.ca/~baum/mgt2005/keiretsu.htm> [Accessed 01 December 2006].


Chen, Min (2004), Asian Management Systems, London: Thomson Learning


Choi, Yongsok (1999), The Structural Transformation of the Japanese Enterprise Groups After the Economic Recession of the 1990s: The Impact of Financial Restructuring on the Keiretsu Structure, Working Paper 99-32, Korea Institute for International Economic Policy.


Gerlach, Michael L. (1992), Alliance Capitalism: The Social Organization of Japanese Business, Berkley: University of California Press.


Hoshi, Takeo (1994), “The Economic Role of Corporate Grouping and The Main Bank System” 285-309, in Mashiko Aoki and Ronald Dore (eds.), The Japanese Firm: The Sources of Competitive Strength, Oxford: Oxford University Press.


Kensy, Rainer (2001), Keiretsu Economy – New Economy? Japan’s Multinational Enterprises from a Postmodern Perspective, New York: Palgrave.


Kikkawa, Takeo (1995), “Kigyo Shudan: The Formation And Functions of Enterprise Groups” 44-53, in Etsuo Abe and Robert Fitzgerald (eds.), The Origins of Japanese Industrial Power: Strategy, Institutions and the Development of Organisational Capability, London: Frank Cass.


Mayasoshi, Ikeda (1998) “Globalisation’s impact upon the subcontracting system” 109-127, in in Hasegawa Harukiyo and Hook D. Glenn (eds.), Japanese Business Management: Restructuring for Low Growth and Globalisation, London: Routledge.


Miyashita, Kenichi, Russell, David W. (1994), Keiretsu: Inside The Hidden Japanese Conglomerates, New York: McGraw-Hill, Inc.


Morikawa, Hidemasu (1992), Zaibatsu: The Rise and Fall of Family Enterprises Groups in Japan, Tokyo: University of Tokyo Press.


Nakata, Masaki (1998), “Ownership and control of large corporations in contemporary Japan” 128-142, in Hasegawa Harukiyo and Hook D. Glenn (eds.), Japanese Business Management: Restructuring for Low Growth and Globalisation, London: Routledge


Shimotani, Masahiro (1995), “The Formation of Distribution Keiretsu: The Case of Matsushita Electric” 54-69, in Etsuo Abe and Robert Fitzgerald (eds.), The Origins of Japanese Industrial Power: Strategy, Institutions and the Development of Organisational Capability, London: Frank Cass.


Watts, Jonathan (2001), ”Misery of the Felled Corporate Warriors”, Guardian Unlimited Business [online], 29 August.

Available at: <URL business.guardian.co.uk/story/0,,543712,00.html>  [Accessed 06 December 2006].


Yoshihara, Kunio (1994) Japanese Economic Development, Oxford: Oxford University Press.


Young, A.K. (1990), The Sogo Shosha – Japans Multinational Trading Companies, Tokyo: Tuttle.

What are the major characteristics and functions of the Japanese keiretsu (系列) ? Reviewed by on 2 grudnia 2009 .

  I. Introduction   This paper examines the major characteristics and functions of Japanese corporate alliance (keiretsu). It will also make an effort to answer to the question about changes which have affected keiretsu. First, this essay will present the formation of keiretsu during the post-war period in Japan. Second, it will be describe the




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