Financial Keiretsu

Historical Background — Financial keiretsu like the Mitsubishi Group have as their bonding agent a financial company, usually a large nationwide commercial bank known as a city bank. The Mitsubishi Group’s main bank, Bank of Tokyo-Mitsubishi, Ltd. is one of nine such institutions today. The others are Dai-Ichi Kangyo Bank, Ltd. Sanwa Bank, Ltd. Fuji Bank, Ltd. Sakura Bank, Ltd. Tokai Bank, Ltd. Asahi Bank, Ltd. Daiwa Bank, Ltd. and Sumitomo Bank, Ltd. Each of these banks as well as their smaller brethren is the center of a keiretsu. although most analysts focus on the so-called Big Six groups and their banks: Mitsui (which has Sakura Bank at its core), Mitsubishi, Sumitomo, Sanwa, Fuyo (Fuji Bank) and Dai-Ichi.

The first three of these keiretsu have a special role in Japanese history. Mitsui, Mitsubishi and Sumitomo are each direct descendants of a pre-1945 zaibatsu (financial clique). In contrast to modern financial keiretsu. zaibatsu did have central direction, often through a dominant family, exercised via a holding company that had a controlling interest in zaibatsu companies. In that respect, they were similar to the chaebol of today’s South Korea.

Gen. Douglas MacArthur and other occupation leaders laid substantial blame on zaibatsu for Japan’s militarism in the 1930s and 1940s. During World War II, zaibatsu companies produced a large part of the nation’s weaponry — for example, Mitsubishi’s A6M Reisen, the infamous Zero fighter plane. However, not a few scholars have concluded that even 60 years ago, zaibatsu represented the establishment in Japan; as such, they clearly saw what they could lose through armed conflict with the United States and its allies. In this view, it was shinzaibatsu (new zaibatsu ), anxious to elbow their way into the top ranks of the economic hierarchy, that were more eager for war.

Whether old or new, zaibatsu loomed as large, threatening organizations to occupation authorities, who ordered them dissolved. Thousands of top officials of 245 big concerns were purged, the companies’ equity was seized, the holding companies were disbanded and, in a few instances, individual companies were broken up.1

Partly for these reasons, the Japanese economy in the immediate postwar years was characterized by incredible flux and uncertainty. One consequence of that environment was a burst of entrepreneurship to fill the vacuum. Entirely new companies were established that were completely free of zaibatsu ties.2 Sony Corp. founded in 1946, is a prime example.

Holding companies no longer existed to coordinate activities among zaibatsu companies. Moreover, very young, junior-level executives suddenly were in charge of huge firms whose physical facilities in some instances had been severely damaged and whose customers had been impoverished by the war. One study found that of 46 new chief executives whose backgrounds could be determined, only six had experience during the war in positions as high as executive director; 20 never had served on a board of directors. Generally, however, the new presidents had reached their positions through internal promotion and were company veterans despite their youth.3

The young men running corporate Japan turned to one of the few sources of expert help available: their former coworkers from zaibatsu. whom they knew from their rotations through member companies. As early as 1946, executives formalized such contacts through what have become known as Presidents’ Clubs. In the meetings of these organizations, which were illegal at the time of their inception, top officials could share such information as what the American occupiers were up to and thrash out problems like how to obtain scarce supplies. The clubs took names like Hakusui-kai (White Water Club) — the name for the Sumitomo Group meetings — that may have reflected their original clandestine natures.

When the American occupation ended in 1952, some zaibatsu reforms were reversed, but others remained in place. For example, the new executives had become comfortable in their positions and never did return control to their former bosses. The Presidents’ Clubs took on a more formal existence. Equity in old zaibatsu companies, which, during the occupation, had been widely distributed among employees and others, tended to flow back to zaibatsu partners. Holding companies, however, remained banned until the late 1990s.

The resultant hybrid organizations became known as keiretsu. translated literally as series or linkage. In contrast to the Mitsui, Mitsubishi and Sumitomo keiretsu. the other members of the Big Six — Sanwa, Dai-Ichi and Fuyo — have no direct prewar predecessors. Although their core banks are comparable in terms of size and influence to the trio of zaibatsu descendants, the latter three usually are considered much weaker organizations.

The Big Six Today — Some companies, particularly if they are the result of mergers among members of different keiretsu. belong to two — or even three — Presidents’ Clubs (see Table 1 ). Most analysts argue that more exclusive, smaller groups are more likely to be effective because coordination of members’ activities is easier. On that basis, the Mitsubishi Group and the Sumitomo Group would appear to have advantages over other keiretsu. a view roughly matching the consensus.

Today, Presidents’ Clubs meet on a regular basis, typically once a month in a downtown Tokyo office, although the Sumitomo Group and the Sanwa Group, both with lead banks headquartered in Osaka, hold some meetings in that city. Presidents only or presidents and chairmen attend, depending on the club. Most meetings are described as vehicles for exchanging views. The Dai-Ichi Group’s Presidents’ Club, though, just meets quarterly in Tokyo for what is called a lecture. Most of those who have attended the sessions of Presidents’ Clubs over the years have suggested when asked that the meetings are primarily social in nature.

The Presidents’ Clubs list is at best a first cut at determining de facto keiretsu membership, as the participation of the automotive industry illustrates. Among vehicle makers, Toyota Motor Corp. belongs to the Mitsui Group, Mitsubishi Motors Corp. to the Mitsubishi Group and Nissan Motor Co. Ltd. to the Fuyo Group, yet Sakura Bank’s influence over Toyota is limited, as is that of Fuji Bank over Nissan.

Beyond this trio, the situation becomes more complicated. Although Mazda Motor Corp. is not a member of the Sumitomo Group’s Presidents’ Club, it long has been considered a part of that keiretsu. Two decades ago, Mazda was on the receiving end of a well-publicized rescue orchestrated by Sumitomo Bank.4 Today, Sumitomo Bank remains the automaker’s largest lender, followed by Sumitomo Trust & Banking Co. Ltd. Together, they are at least three times as important as the next-largest lender, Bank of Tokyo-Mitsubishi. Two of Mazda’s 35 directors come from Sumitomo Bank.5

Yet Mazda’s biggest shareholder is Ford Motor Co. whose 33.4 percent stake dwarfs the combined 8 percent or so holdings of Sumitomo Group firms. Moreover, a Ford representative heads the company, and four board members are from Detroit. Mazda and Ford also have links at the operating level within the increasingly global automotive industry.

Isuzu Motors Ltd. is a member of the Dai-Ichi Group’s Presidents’ Club, yet its relationship with General Motors Corp. resembles that of Mazda and Ford. The world’s top vehicle builder owns 49 percent of Isuzu’s stock, far ahead of runner-up Dai-Ichi Kangyo Bank, which has a mere 2.3 percent stake. DKB, however, is Isuzu’s the largest lender, with roughly a 15 percent share.

Similarly, Daihatsu Motor Co. Ltd. is a member of the Sanwa Group, but otherwise its connection seems obscure, to say the least. The minicar maker is closely tied to Toyota — nominally a Mitsui Group member — which holds 51.1 percent of its shares. Sanwa Bank owns only 0.9 percent of the stock. Among other financial institutions, both Sumitomo Trust & Banking and Mitsui Mutual Life Insurance Co. are more prominent stockholders. None of these three financial institutions appears to be important as lenders. Daihatsu’s 30-member board of directors does not include representatives from any other Sanwa Group company.

Honda Motor Co. Ltd. is regarded as independent of all automotive makers and banks, foreign and domestic. It belongs to no Presidents’ Club. Yet its ties to the Mitsubishi Group are more than trivial. Its three largest stockholders are Mitsubishi Trust & Banking Corp. Bank of Tokyo-Mitsubishi and Tokio Marine & Fire Insurance Co. Ltd. in that order. Together, the three own 14.6 percent of Honda’s stock. Bank of Tokyo-Mitsubishi and Mitsubishi Trust are Honda’s largest lenders, and a BTM representative sits on the firm’s 40-member board.

In short, the Presidents’ Clubs list is not necessarily an accurate reflection of the links between automotive makers and their primary financial institutions. The Daihatsu example suggests that Presidents’ Club membership may overstate the influence of the leading keiretsu. while the Honda example indicates that the clout of the Big Six extends to companies that are not part of a Presidents’ Club. This uncertainty has led to a plethora of compilations of keiretsu .6 Yet these alternatives also make arbitrary choices as to who is in and who is out, with a lot of movement back and forth from year to year.

Presidents’ Club criteria are, on balance, a very conservative measure of the impact of the Big Six on the Japanese economy, but even by that yardstick, they loom large (see Table 2). Excluding their bank and insurance company affiliates, in FY 1998, the Big Six accounted for 3.2 percent of total employment, down from 4 percent in FY 1988, and 11.5 percent of total sales versus 13.6 percent 10 years earlier.7 The relatively high proportion of sales is a result of the presence of one or more trading companies in each group, as is the declining share of employment and revenues over the past decade.

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Table 2: Role of Big Six Keiretsu in Japan’s Economy, March 31, 1999