Asia Times: Japan's 'Third Wave' breaks onto keiretsu rocks : Rental Car Reservations


	March 27, 2001	atimes.com

Japan

Japan's 'Third Wave' breaks onto keiretsu rocks
By Yone Sugita

The First Wave

TOKYO - In July 1853, American naval officer Matthew C Perry came to Japan and demanded the Tokugawa Shogunate open the country and conclude diplomatic and commercial relations with the United States. Japan was forced to sign unequal treaties not only with the United States, but also with other advanced Western countries.

The new Meiji government implemented drastic reforms in virtually all areas, especially in the economic and military fields, in order to catch up with the European powers, employing polices of increasing the nation's wealth and military power. Drastic reforms caused economic turmoil and severe inflation in the late 1870s, which precipitated financial reform, resulting in the establishment of the Bank of Japan in 1882. The foundations for the zaibatsu, a family-owned group of giant industrial and financial combines, conglomerates, or cartels, such as Mitsubishi, Mitsui and Sumitomo, were actually laid in the early Meiji period. The Meiji Restoration was the First Wave of Japan's financial and industrial reform and development.

The Second Wave

The end of the Asia-Pacific War and the beginning of the Allied Powers' occupation of Japan marked the Second Wave. The zaibatsu's dissolution and economic purge, which eliminated between 1,500 and 2,000 managers, helped the rise of new professional managers. A large company usually had at least one executive who had spent his earlier career in a bank, facilitating a smoother relationship between the lender bank and the borrower.

In addition, banks normally sent their executive members to borrower companies to accumulate information and to monitor their conduct. When inappropriate management caused substantial loss of profits, banks intervened and requested a change of managers. On the other hand, the monitoring of bank's loans signalled that the management of the borrower industries was healthy, which induced other banks to lend money. When the controlled economy gradually became a market economy, major banks became industrial monitors and consolidated inexperienced industrial management. The financial community acquired the power to manage the Japanese economy, and the Bank of Japan's controlling power over the finance community grew stronger.

During the early occupation period, the Japanese bureaucrats continued, if not increased, their control over the economy. It was the golden age for the Ministry of Commerce and Industry (MCI), which accelerated the planned economy in conjunction with the Allied Powers' General Headquarters' (GHQ) "New Dealers".

Then prime minister Shigeru Yoshida did not like the MCI's approach and, in cooperation with his close aide, Shirasu Jiro, sought to reduce its influence and to make the Japanese economy a more liberal one. As the first step to implement their scheme, Yoshida appointed Shirasu head of the Board of Trade in December 1948. Then, in February 1949, the Yoshida Administration suddenly announced the combination of the MCI and the Board of Trade to establish a new Ministry of International Trade and Industry (Miti). Shirasu explained that this new ministry would primarily stress the promotion of exports instead of the then priority production system. Since the Japanese Ministry of Foreign Affairs (JMFA) had a strong influence in the Board of Trade, Yoshida tried to make it the most important section so as to subordinate the Miti to the JMFA.

In short, occupation reforms actually caused three major complicated, and seemingly contradictory, effects to the subsequent development of the Japanese economy: a restructuring in which the financial community manages overall order and stability; the liberalization of the Japanese economy from government-oriented economic planning; and the strengthening of the bureaucrats' power over the direction of Japanese economic growth.

Japan turned its zaibatsu organization into the keiretsu system, which is made up of corporate alliances bound together by preferential lending, supply, distribution, mutual appointment of directors, financing, and intra-group transactions, and webs of cross-shareholdings among groups of firms and banks to manage the risks inherent in business transactions. The keiretsu system provides long-range strategies to expand market share at the expense of short-term profit and general equity holders' benefits. The occupation reforms constituted the Second Wave in the historical development of the Japanese economy.

The Third Wave

Combining the three major elements above, the Second Wave precipitated and sustained high-speed economic growth in the 1960s and managed to overcome the severe impacts of two oil crises in the 1970s. In the Second Wave, the keiretsu system was actually an excellent one in terms of developing human resources. The seniority system helped maintain stable order in companies and encouraged younger employees to respect the experienced. The life-long employment system nurtured harmony between labor and management. The bureaucrats and the business community successfully cooperated with each other in many occasions to develop the Japanese economy.

Since the keiretsu system virtually prevented bankruptcy among the member companies, it encouraged main banks to make over-investments. As a result, the Japanese economy enjoyed a great castle in the air, in what came to be known as a bubble economy, in the 1980s. This illusory decade of prosperity actually paved a road to fundamental structural changes in the economy. In addition, rising global economic competition and advanced information technologies are forcing major Japanese companies to re-examine their strategies, which has propelled this change of seeking out business opportunities regardless of keiretsu.

Major keiretsu, such as Mitsubishi, Fuyo, Mitsui and Sumitomo, could no longer solve their members' serious business and financial problems internally, and sought alliances outside their own group. For example, in 1998, Nikko Securities Co, a primary investment banker in Mitsubishi Keiretsu, concluded a capital and business deal with Citigroup Inc for US$1.8 billion. Nikko Securities Co desperately needed capital and marketing know-how to alleviate its mounting losses, assistance the Mitsubishi keiretsu could not provide. In April 1999, Mitsubishi Oil, a member of Mitsubishi keiretsu, merged with a non-keiretsu member Nippon Oil. Sumitomo Bank, the main bank of Sumitomo keiretsu, and Sakura Bank, the core bank of the Mitsui keiretsu, will merge in April 2001 to establish the world's third-largest bank with the assets of 99 trillion yen ($936.3 billion). Necessity was the mother of radical changes. The decline of the keiretsu system may open up the Japanese market further to foreign direct capital investment. This structural change marks the beginning of the Third Wave.

The global economy is on the brink of a serious crisis, to which Japan's poor economic performance, especially the slow disposal process of Japan's bad loans, has greatly contributed. In the recent Japan-US summit, President George W Bush urged Prime Minister Yoshiro Mori to take the necessary measures to improve Japan's economy. Deep tension, however, still exists in Japan between those who propel the Third Wave and those who try to preserve the old way of doing business.

Industries that are globally competitive, such as information technology, automobile manufacturing and consumer electronics, drive the Third Wave. For example, forward-looking companies such as Nissan-Renault and Sony have propelled dramatic restructuring processes. In addition, capital-intensive and knowledge-intensive industries, such as the financial and high-tech sectors as well as start-up, venture-capital companies, support further reforms to realize a more open and competitive business environment in Japan. On the contrary, small or family-owned businesses and labor-intensive industries, such as textile industries, oppose drastic changes because they cannot adapt to a new situation very quickly.

Not only old-guard industrial sectors but also politicians of the Liberal Democratic Party (LDP) and bureaucrats who are deeply rooted in the Second Wave strongly resist rapid deregulation. Over a hundred Diet members, including more than half of the current LDP Diet members, established an anti-reform group to examine the negative aspects of deregulation. The old-guard political force is the biggest obstacle to the acceleration of Japan's reform.

The Meiji Restoration and the Allied Powers' occupation reforms had revolutionary impacts on Japan, but the country flexibly restructured its economy in both cases. The question now is whether the Japanese people are prepared to restructure their economic system one more time. Considering the fact that Japan's economy is still the second largest in the world, contributing 11 percent of global Gross Domestic Product, Japan must assume responsibility for accelerating its ongoing reforms.

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