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Consider Japan

Chapter VII

After the Zaibatsu

THE Zaibatsu were the rich families of prewar Japan (Mitsui, Mitsubishi, Sumitomo, etc.) who owned the great industrial empires, sometimes delegating the job of management to hired managers, but sometimes, actively controlling the boards of directors themselves. After the war the Americans, with reforming zeal, split up the firms in these mass empires into individual entities; but this was like grappling with a jellyfish, for the habit, of cohesion has remained. It is secured now by interlocking directorships and high-level executive consultation among the firms that used to belong to the old groups; by inter-company shareholdings among group members; and by the fact that one of the big city banks – several of which are successors of the old Zaibatsu banks – is likely to hold a central position in each group. This last point is important because of the major role’ which the banks still play in financing new fixed investment in Japan – even though direct sales of shares to the public are growing fast (and are helped on their way by security selling departments in the main ordinary shopping streets, which operate in the way that betting shops are not allowed to operate in England, with the latest stock prices shown on television screens, and a commentator jabbering away excitedly as prices change).

When some new sort of industry (say, petrochemicals), becomes the rage in Japan, the group around one bank will set up a firm to take part in it; then the group around another big bank will seek to set up a rival company, almost as a matter of face. This has provided the country with a real, if peculiar, kind of competition in constant modernisation. The big firms will often tell you that this is “excessive competition” and that “the government ought to do something about it” (meaning that the government ought to step in and stop other groups setting up rival firms to themselves). But one suspects that it is, in fact, a kind of competition from which Japan has made great net gains in recent years.

Inevitably, the system means that the big firms which have close connections with the banking groups generally have an advantage in raising funds. The rates which the smaller firms have to pay are often considerably higher even than the 10 per cent or so nominally charged; for example, a bank may say that the borrower must redeposit with it (at an interest rate well below the lending rate) part of the money nominally loaned, thus greatly increasing the effective interest rate really charged. Most of the small firms work mainly as sub-contractors to the big ones. One might therefore suppose that the big firms would hand on considerable credit to them. But surprisingly often things work in the reverse direction. During a credit squeeze the big firms may pass on the effects of a capital shortage by paying their sub-contractors in, say, three-months promissory notes, which then have to be privately discounted (at rates, when your correspondent was in Japan in 1962, of up to 25 per cent per annum) by the small firm in the market.

No doubt the big firms are unlikely to allow bankruptcy to overtake any sub-contractor who is really efficient and useful to them. They are more likely to want to see bankruptcy overtake the less efficient sub-contractors, or (this, of course, is the unhealthy part of the system) small firms which compete with them by putting products directly on the market at a cut price. This last sort of squelching of competition, however, is probably more usual in the older trades like textiles than in the newer trades like engineering; in the latter, the small firms cannot generally make completed products anyway, but act as sub-contractors for the big ones.

As has been argued above, your correspondent came to the unorthodox view that this system – by which credit squeezes have tended to fall more harshly on the less efficient firms – has probably been of real if cruel advantage to the Japanese economy as a whole. But it is natural that many ordinary people – and even more small businessmen and politicians who depend on their votes – do not see things that way. In the latest (1962) credit squeeze, there were signs that the authorities might be trying to put more of the strain of the squeeze on the big fellows, and less on the small, compared with what happened in the squeezes of 1954 and 1957; in the summer of 1962, for example, when the period of tax collections fell due, the government was deliberately pumping out fairly large special loans through the various special institutions which lend directly to smaller businesses. Socially, this is understandable; economically, it might be a mistake.