Together We Are Strong (?): How Japan’s post-war conglomerates shaped and is still shaping its future today
It does not take you long on a trip to Japan to notice all the things that are different from what’s back home, or in fact everywhere else in the world: everyone here wears masks; there are no bins; and would you be believe it, the trains always come on time!
However, perhaps one small but perplexing detail that many miss, is how often the same brand names tend to pop up everywhere in Japan, particularly the likes of Mitsui, Sumitomo, Mitsubishi etc.. But we Australians also see the same big four banks everywhere we go right? Well, although we are no stranger to powerful oligopolies, the key here is how these brands are not merely prominent in one sector such as banking, but across a vast range of verticals including industrials, real estate, and insurance. They are more than just large companies; they are the ubiquitous Japanese conglomerates, the keiretsu.
How the Japanese economy found itself in its current position was through a strategic trade-off it made more than 70 years ago, one that in many ways has been underpinning its trajectory ever since.
As much as World War II made a serious dent in the Japanese economy, it also gave them an open playing field where they could make a fresh start with nothing to lose. Somewhat ironically, the post-war rebuilding phase mandated very significant investments into specific sectors such as infrastructure and manufacturing in a very similar situation to wartime. This meant that it was advantageous for the Japanese government to rebrand the collectivist power and efficiency of the zaibatsu (vertically integrated hierarchal monopolies) for their age of rebirth. Indeed, after the forced dissolution of these zaibatsu sent a shock through the entire economy that reshuffled the business landscape, the Japanese government sought to encourage and build relationships with multiple business groups that were horizontally integrated instead; these are what we now know as the keiretsu. So instead of having hierarchal monopolies that prohibited competition, Japan decided to concentrate its capital to a group of conglomerates that had the best resources so that while they limited competition from new entrants, their capital efficiency would be much higher than leaving it to the free market – something very important for a time that demanded urgency and characterised by budget limitations. These conglomerates were often established with a commercial bank at its centre so that not only can the government bolster industrial policies of targeted credit and tax breaks, but this financial umbilical cord also helps to keep these powerful giants in check.
This coordinated approach allowed Japan to maximize economic gains out of its limited resources. The Japanese government’s collectivist strategy resonated strongly with the conscience of the public sphere since sacrificing for your company was soon equivalent to sacrificing for your country as these conglomerates became the vehicles of Japan’s recovery ambitions. This unprecedented unity of effort was best encapsulated by the guiding principles Japanese business leaders spoke of at the time - sanpo-yoshi - the three-way satisfaction of buyer, seller, and society.
And in return for the long hours of work their employees put in in often harsh conditions, these keiretsu promised lifetime employment, housing, social welfare, and continuous advancements with seniority – a system that only works very well in strong macroeconomic conditions. Precisely, during Japan’s booming period, this kind of corporate culture attracted the most well-educated talent to these conglomerates and allowed them to continuously grow and recruit top talent at an even greater scale then before.
Equipped with an educated, hardworking, loyal workforce, and capital-efficient keiretsu, Japan was an icebreaker ship that was unstoppable wherever the top-down decision-making wanted it to go. The results were stellar. In 1950, Japan's GDP per capita was just $1,921. By 1970, it had grown over 5-fold to $11,439 in just two decades. And they continued to achieve growth averaged 10% annually through the 1980s. Soon, Japan came to dominate global industries like automobiles, electronics, and robotics. In fact, at the height of the Japanese Economic Miracle, the largest company in the world by market capitalisation was the Industrial Bank of Japan (IBJ), the number two banker to all the keiretsu that once also served as the Japanese government’s public sector bank.
So, what happened? How did such a seemingly well-oiled economic growth engine break down?
As with any game, the same strategy may not always work out if your circumstances change, and in the case of Japan, it was its changing roles within the global economic landscape. How you ought to play the game as a war-torn country seeking to rebound economically is expectedly different to how you should as the then-second-largest economy in the world. And perhaps it was the overconfidence from decades of rapid growth that left all competitors far behind in its wake, or the inherent risk avoidance and rigidity built into its corporate and labour systems that were camouflaged as employment stability and employee loyalty in the past, Japan was slow to adapt.
Japan’s strategy first began to collapse from the top. Picking sectors to coordinate public and private investment into for a less developed economy was comically straightforward: you copy what the leaders are doing, and you do incrementally better or at lower costs. This was the case for many of Japan’s most influential industries such as electronics and automobile. However, once Japan has reached a leading position in the global economy, it had nowhere else to look but to itself. And as the billion-dollar failed investments of Japan’s Ministry of International Trade and Industry (MITI) began to roll in, such as high-definition analogue televisions and magnetically levitated trains, investors soon realised that left to its own devices, the Japanese government is no better than any other government in picking the next inflection point that would bring another wave of growth.
Consequently, Japan’s collectivist corporate landscape of keiretsu, the sheep of the Japanese government’s shepherding, too became obsolete in their ways. Many of these companies, weighted down by the tougher macroeconomic condition, began to suffer from the lifetime employment guarantees that it once offered to their employees. Company departments whose business sector was made redundant during the post-bubble transitionary process often still had to keep on staff that was now not meaningfully contributing to the success of the firm. And beyond the revered offices of the keiretsu, those same features of Japanese society that powered its post-war growth now constrain its entrepreneurial ecosystem that trying to reinvigorate its stagnant economy.
Japan is currently home to only about a dozen unicorns – start-up companies valued at more than $1 billion – compared to over 500 and over 300 respectively in the US and China. To put things into perspective, that’s about the same number of unicorns as its neighbour and rival South Korea, whose GDP is only one-third of that of Japan. Whilst the unicorns are not the perfect measure of a country’s propensity to innovate, it is certainly an appropriate indicator for how suitable a country’s corporate and market environments are for an emerging company to scale and grow. Japan built its economic miracle on conformity, risk avoidance, and social obligation. But startups require individualism, risk-taking, and incentive structures aligning effort with rewards. Japan must determine how much of its traditional collectivist corporate culture it is willing to unsettle in pursuit of new engines of growth.
To rekindle innovation within its borders, the Japanese government is undertaking targeted reforms to strike a balance between traditional collectivism and unbridled individuality. Major corporations are slowly moving away from lifetime employment but aim to maintain job security and welfare. Performance reviews and merit-based pay are emerging to reward talent, while retaining a team-first emphasis that have always served them well on the world stage.
Government agencies such as MITI’s successor METI are working now to actively support entrepreneurship and startups through sovereign innovation funds and initiatives like J-Startup. Elite universities such as the University of Tokyo are also looking to foster entrepreneurial spirit and creativity in students traditionally headed for corporate jobs with catered programs and media that highlight past alumni founders, though stigma remains around falling outside traditional career norms.
These measured efforts are starting to bear fruit. Lifetime employment guarantees are unwinding to increase labour mobility, without abandoning worker security. Corporate venturing arms, startup accelerators, and entrepreneurship programs are proliferating. Over the last decade, venture funding has markedly increased. In fact, in 2022, when venture funding was shrinking in fear of future contractionary environments, Japan was one of the only countries where venture funding experienced meaningful growth.
While change is gradual, Japan appears to be finding an elusive balance. Sustaining collectivism's strengths while removing impediments to creative disruption. But it is a delicate game, and one must wonder what exactly is at stake – whether the unicorn supremacy truly translates to citizen welfare or is Japan going all-in on an uncharacteristically risky gamble?
References
Robert J. Crawford, Reinterpreting the Japanese Economic Miracle
Roland Kelts, Japan’s sleepy tech scene is ready for a comeback
David McElhinney, The Current Shape of Japan’s Startup Culture
Masahiro Takada, Japan’s Economic Miracle: Underlying Strategies and Factors for Growth
Oscar Zhu – Publications Director, ESSA