Keiretsu – Rise and Evolution

The Logo for the Mitsubishi Keiretsu


Keiretsu, what is it and how does it relate to the economic development of Japan and how business is done? We will look at what the keiretsu are, what purpose it plays, and what benefits it provides. We’ll look at the structure of keiretsu, how it is different from other business groups. From there we’ll look at the history of the keiretsu, from their roots in the zaibatsu before World War II, to their role in Japan’s recover, and how they evolved after the bursting of the asset bubble and the subsequent lost decade. We’ll go over some of the tools Japanese management used in running the keiretsu as well, such as the three “sacred treasures”. For now let’s take a look at what exactly the keiretsu is and how it is utilized.

Keiretsu, What is It?

So then, what exactly is the keiretsu? Keiretsu is a type of Japanese business group that is rather unique to Japan. Basically, there is a central bank in the group, and several large businesses who all come together and each own a share in the other. There is no particular company at the top of the keiretsu group. For a simplified example, say there are 10 core companies in a keiretsu group, each company would own about 5% share in the other companies. Having each of the companies as part owner of the other companies serves to insulate the companies from outside competitive sources. They don’t have to worry about being bought and taken over in a hostile takeover. Another rule within a keiretsu group is companies within a group don’t compete in areas the others are in. So if one company makes TVs, there won’t be another company in the keiretsu group that makes them, only the one company. It also opens up companies to long term planning goals. Instead of focusing on short term profit goals, banding together allows them to focus on goals such as increasing market share, which may not produce the best profits at first, but in the long run would put the companies in a competitive advantage to make more profit later.

This quote highlights the advantages of the keiretsu well; “Debt levels within a keiretsu are determined by the need for funds consistent with keiretsu goals. In this setting, the debt level for any one member firm may be decoupled from any considerations of an optimal capital structure. Whereas shareholder orientation may not be able to influence a firm’s debt decision, safety considerations could significantly affect debt policies. If a keiretsu member is financially distressed, loans may be rolled over and new financing arranged. Additionally, keiretsu partners may be supportive by purchasing exclusively the outputs of the troubled firm at above market prices. Further, it is observed that stronger keiretsu participants have a great deal of financial slack, thus, diminishing the importance of corporate debt policy” (Wright).

Structure of Keiretsu

The first of the two main structural components of a keiretsu is the Horizontal Keiretsu. The Horizontal Keiretsu is the main companies within the group. These are the big companies that each owns a stake in the others, as well as the central bank that finances the group’s activities. “Each keiretsu usually includes other financial institutions, general trading companies, and industrial firms in virtually all the important sectors. About one-half of the 200 largest industrial firms and almost all leading financial institutions maintain clear affiliation with a horizontal keiretsu” (Hicheon). These are the big companies that meet together and plan the path ahead for each other. They are at the top of the food chain.

The second of the two main structural components of a keiretsu is the Vertical Keiretsu. If the Horizontal Keiretsu are the top companies, the Vertical Keiretsu are the companies under each of the respective top companies. Usually they are owned entirely by just the one top keiretsu company and usually make up the supply chain for that top horizontal company. The Vertical Keiretsu companies are the suppliers, the manufacturers, and distributors of one industry. The top horizontal companies have the most prestige; the further down you go in the vertical chain of companies, the less prestigious the company is. “The vertical keiretsu are tight, hierarchical associations centered on a single, large parent firm and containing multiple smaller satellite companies within related industries. While focused in their business activities, they span the status breadth of the business community, with the parent firm part of Japan’s large-firm economic core and its satellites, particularly at lower levels, small operations that are often family-run” (Gerlach).

The best way to illustrate these two structures is a picture. The Horizontal Keiretsu are the four big circles in the center. The Vertical Keiretsu are the small circles extending out from the core companies, the Horizontal Keiretsu.

The Beginnings – Zaibatsu

How did the keiretsu come to be? Before World War II, the Japanese economy was dominated by the Zaibatsu. These Zaibatsu controlled most of the industries through monopoly power. They were basically government sanctioned monopolies. One of the main features of the Zaibatsu is that they were all family owned. The structure of the Zaibatsu is at the top there is a bank, which then completely owns companies under it. The families that owned these various Zaibatsu were very powerful and many politicians were wary of them because of that power.

A changed occurred though after World War II was completed and the US occupied Japan. The US, with the anti-monopoly atmosphere created by FDR, decided to dismantle the Zaibatsu because they were thought to be too powerful. The process did begin and some dismantling did occur, however, it was stopped before completion. After World War II, communism began its rise, and the US, wanting a capitalist ally in the Asian Pacific region, decided to help Japan rebuild its industries. It is from these circumstances that the keiretsu were born from the ashes of the Zaibatsu.

The Japanese Miracle

Between the years of 1950 through 1973, Gross National Product (GNP) grew at an average rate of 10% per year, which was unprecedented at the time. This growth rate slowed down after the 1973 Oil Crisis and after that Japan’s GNP grew at an average rate of 4.3% from 1974 and 1985. Although much reduced from its previous period of high growth, Japan was still growing at a faster rate than the US and other developed economies in Europe.

What sort of role did the keiretsu play in Japanese Miracle growth? Keiretsu has had traditionally close ties with the government. After World War II the government placed a priority of economic growth and enacted policies to both protect industries and help them grow. The Japanese government often gave advice to business and helped direct the investment of the keiretsu groups. Whether this was through licenses, tariffs, quotas, or other protections the government did its best to help encourage the growth and investments of these companies. Because of this long high growth period, both the companies and government had high sway and influence in the economy. After all, with 10% average GNP growth, it was hard to argue with the results, as such the government and businesses, particularly the keiretsu, were basically unquestioned. As such, the ruling party, the Liberal Democratic Party, held dominance for over 50 years.

The Three “Sacred Treasures”

What were some of the tools that the keiretsu made use of to help fuel the Japanese Miracle? There were three tools that Japanese Management made use of; these three tools were referred to as the three “Sacred Treasures”. These three “treasures” played off each other, for one of them to have power, the other two must be present to work. These three treasures were Lifetime Employment, Seniority Wages, and Enterprise Unionism.

Lifetime employment in Japan is not what most people think it is. First thing to be aware of is it applies to less than 50% of the workforce and that it also applies primarily to men, as most women leave the workforce either upon being married or upon having a child. Lifetime employment is an agreement without a contract; it is basically based on honor and trust between the employee and the company. Lifetime employment also doesn’t always start and end with the same employer, as mentioned earlier the vertical keiretsu have many companies up and down the chain and employees can be moved up and down that chain as needed. The further aware from the core horizontal keiretsu company is, the less prestigious the company. The last aspect to be aware of is that lifetime employment occurs mostly in large enterprises, like the companies comprising the keiretsu. It is less common in mid-sized companies and scarce in small companies (Malixi).

Year    Seniority    Ability (Merit)
1978    57.9%    42.1%
1983    54.4    45.6
1984    49.0    51.0
1987    46.0    54.0
Source: (Malixi) p.60

The second of the treasures is seniority wages. Seniority wages is based on the simple concept that the longer you work at a company, the higher your wages are. Wages also tend to grow at a predictable rate. Merit comes into play in what rank one would hold at a company. This consistency and predictability helps to reinforce worker loyalty and commitment. Seniority as a factor in wages has been decreasing while merit has been increasing, but seniority is still a significant factor. Because of this long term commitment with seniority wages and lifetime employment, this meant that the recruitment process is long and thorough. Because of this effort to find the right worker, this means there is a high cost to recruitment, as such there would also be a high layoff cost as well as it would be expensive to replace an employee if laid off.

The last of the three treasures is enterprise unionism. Surprisingly, the rate of unionization in Japan is higher than many know about. The rate of unionization in Japan is higher than the US, but lower than Europe. However, unions in Japan are different from unions elsewhere. In Japan, unions are for each individual firm rather than for a whole profession. So instead of a union for the entire auto industry, there would just be a union for say, Toyota, and another separate union for Mazda. Enterprise unions gives more flexible negotiations for a company, as it allows for the individual situation of the company to be taken into account when bargaining. So if a company is doing well, the union will get more, if it is currently in a poor situation then the union will cut back to help the company get back on its feet. Another distinct difference from the unions in Europe is that unions are not required by law in Japan, it is completely voluntary.

The Bursting Bubble

Between the 1985 and the early 1990s, land and stock prices were increasing at a rapid pace. Because of the high savings rate, there was a lot of capital available to borrow to invest and it was very easy to get a loan. The problem is that most of the profitable investments that would earn a return were now gone, but all this capital was still around. So this excessive capital was put into land and stock speculation and prices built up. However, all this land and stock does not earn any money back and eventually the bubble popped. Land and stock prices plummeted and people were left with debt they could not pay back and assets that were worth less than what was paid for them. The result of this is what has been called the lost decade.

The Lost Treasure and Influence

For both the keiretsu and the government that supported them, this greatly decreased this influence in the economy. Without the record growth that supported them before, they could no longer direct the economy as they once did. Part of the reason for the bubble was that the government had advised the banks in the keiretsu and encouraged them to continue to lend money to and support non-performing companies, companies that had little to no hope of ever paying back these loans. Wright’s observation is that the keiretsu ultimately end up protecting the weaker members of the group at the cost of the stronger members can help explain why when the bubble burst, these banks were left with these bad debts which crippled them. “Japanese group decision making structures are driven by a sense of total commitment of group members to their leader and vice-versa, this level of commitment has the potential to hinder the system’s ability to identify and to react appropriately when the system is following a failing course-of-action. Japanese are reluctant to abandon such a system. Prospect theory suggests those ‘sunk cost effects’ naturally occur once an investment in money, effort or time has been made, and individuals have a ‘personal stake’ in the outcome, and choose not to alter their actions” (Allen).

Loyalty within the keiretsu shifted from the betterment of the business group to loyalty towards the shareholders in the company. As a result of this many companies within these keiretsu started to shift from long term market share goals to short term profit goals to remain competitive. Because of this shift, lifetime employment has continued to decline and may eventually be insignificant. Seniority also now has less influence on wages than it once did and is becoming more dependant on individual merit. As a result of this trend, this has given rise to more mid-career hires which was extremely rare in the past.


The Keiretsu are by no means perfect business groups. They have flaws just like any other model. However, there are certainly things we can learn from these groups that may be applied and combined with business practices in the west to create a possible superior hybrid. The focus on long term goals and building a culture of workers dedicated to a company is something that other organizations could give more focus to. The enterprise union system, unique to Japan, is one that would be interesting to see applied elsewhere in the world for its flexibility for both the companies and their workers. If the system can work out a way of evaluating weaker companies within the keiretsu and then evaluating whether a company should be kept or divested, a great weakness would be closed and increase its viability as an alternative business group model. The keiretsu system certainly has had success, and by identifying these successful factors, they can be examined and possibly applied to other companies around the world if they are found to be a good fit for an organization.

Works Cited

Allen, Richard S, Marilyn M Helms, Margaret B Takeda, & Charles S White. (2007). PORTER’S GENERIC STRATEGIES: AN EXPLORATORY STUDY OF THEIR USE IN JAPAN. Journal of Business Strategies, 24(1), 69-90.  Retrieved May 20, 2012, from ABI/INFORM Global. (Document ID: 1286522911).
Gerlach, Michael L. (1992). Alliance Capitalism: The Social Organization of Japanese Business. Berkeley:  University of California Press. Retrieved May 20, 2012 <>
Hicheon Kim, Robert E Hoskisson, & William P Wan. (2004). POWER DEPENDENCE, DIVERSIFICATION STRATEGY, AND PERFORMANCE IN KEIRETSU MEMBER FIRMS. Strategic Management Journal, 25(7), 613+.  Retrieved May 20, 2012, from ABI/INFORM Global. (Document ID: 654852121).
Malixi, Margaret. (Eds.) (2011). GROWTH AND CRISES IN THE ASIAN PACIFIC RIM. Cognella.
Wright, P., Ferris, S., & Sarin, A.. (2002). AN AGENCY COMPARISON OF THE KEIRETSU AND THE JAPANESE INDEPENDENT FIRM. Academy of Strategic Management Journal, 1, 1-18.  Retrieved May 20, 2012, from ABI/INFORM Global. (Document ID: 2546678251).


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