Japan’s corporate governance system known as a keiretsu dates back to the 1600s, but was propelled by the Japanese government’s newly formed Meiji Restoration in 1866 as the world entered the industrial revolution. These early corporate formations were termed zaibatsu, translated to English as monopoly. Zaibatsu’s began as small, family-owned enterprises that formed in various Prefectures across Japan to specialize in the separate business needs of the nation. As Japan’s economy grew, zaibatsu grew to later form into holding companies.

The Collapse of the Zaibatsus

When the U.S. rewrote the Japanese constitution after World War II, the United States and the Allies eliminated zaibatsu holding companies because of their undemocratic nature as monopolies, and Japanese governmental policies that perpetuated their existence. Studies suggest zaibatsu holding companies bought politicians in exchange for contracts, exploited the poor in pricing mechanisms and exploited dysfunctional capital markets. all to perpetuate their existence. However, with Japan devastated after World War II, Japanese companies reorganized as keiretsus, which translates to lineage in English, and structured as either a horizontal or vertical integration model.

Under a zaibatsu, the largest industrial groups allowed banks and trading companies to be the most powerful aspects of each of the cartels and sit at the top of an organizational chart. Banks and trading companies controlled all financial operations and the distribution of goods. The original founding families were in full control of all cartel operations.

Today’s keiretsu horizontal model still sees banks and trading companies at the top of the chart with significant control over each company’s part of the keiretsu. Shareholders replaced the families controlling the cartel as Japanese law allowed for holding companies to become stockholding companies. Yet vertical integration is still a part of the larger horizontal structure of today’s keiretsu. For example, each of Japan’s six car companies belong to one of the big six keiretsus as do each one of Japan’s major electronics companies.

Modern Horizontal Keiretsus

Typical of a Japanese horizontal keiretsu is Mitsubishi where the Bank of Tokyo-Mitsubishi sits at the top of the keiretsu. Also part of the core group is Mitsubishi Motors and Mitsubishi Trust and Banking followed by Meiji Mutual Life Insurance Company which provides insurance to all members of the keiretsu. Mitsubishi Shoji is the trading company for the Mitsubishi keiretsu.

Their purpose is strictly distribution of goods around the world. They may seek new markets for keiretsu companies, help incorporate keiretsu companies in other nations and sign contracts with other companies around the world to supply commodities used for Japanese industry. As you’ve no doubt noticed, many companies within this keiretsu have Mitsubishi as part of their name.

Modern Vertical Keiretsus

Vertical keiretsus are the group of companies within the horizontal keiretsu such as Toyota. Toyota’s success is dependent on suppliers and manufacturers for parts, employees for production, real estate for dealerships, steel, plastics and electronics suppliers for cars as well as wholesalers. All ancillary companies operate within the vertical keiretsu of Toyota but are members of the larger horizontal keiretsu, although much lower on the organizational chart. Without Toyota as the anchor company, these companies may not have a purpose for existence. Toyota exists as a major keiretsu member because of its history and relationship to major horizontal members that dates back to its early years of the Meiji government as the first exporter of silk. The Japanese focus on societal relations, as well as cross shareholdings, allowed keiretsus to perpetuate themselves since World War II.