Company capitalism - Japan

Has Japan's market economy reached a turning point?

Companies are the key players in Japan's market economy and are regarded as legal entities in their own right. The main share-holders in large businesses are not individuals but interdependent companies with cross-holdings in each other. I call this system "company capitalism".

Individuals, companies and the state are the three main components of a market economy. A study of this market calls for analysis of the relations between companies and individuals, between companies themselves, and between companies and the state. One feature of Japanese company capitalism is that the volume of trade between companies is far greater than that between companies and individuals, or between companies and the state. This is one of the characteristics of Japanese company capitalism. Furthermore, private enterprise is by far the largest source of the nation's wealth. Businesses have a massive superiority over individuals, which they dominate or "envelop".

On the market for manufactured goods, which is dominated, as in the United States and Europe, by an oligopoly of large corporations, prices, quality and services are imposed by companies on individuals - on what is clearly not an equal footing.

Many products (notably in the automobile and electrical goods sectors) are distributed according to the keiretsu system (keiretsu are vertically integrated groups of companies). Manufacturers form keiretsu with wholesalers and retailers. They give orders and try to fix prices. The big retailers such as supermarkets compete with this form of distribution by selling at rock-bottom prices, but they keep well in with the manufacturers all the same.

The primacy of the company over the individual is most apparent on the job market. The distinctive features of Japanese management are "a job for life, wages based on length of service, and company unions", but since relations between businesses and individuals are not on an equal footing, the job-for-life system means that the individual is absorbed by the company. Take the question of recruitment. On April 1st each year, all companies hire new graduates at the same time, going on to give them in-house training and teach them the company culture. Each recruit is given a post and then moves around within the company according to its staffing rota. Recruits get "a company" rather than "a job". In this context the market mechanism does not function and the job market is non-existent. The company calls the tune.

In theory the unions act as a counterweight to the company, but Japanese unions are organized within companies, and not grouped by trades or branches. In other words they are not a strong force of opposition, and in fact, companies use unions to implement their staffing and other policies. The basic principle of company capitalism is that the company comes first. The staff is a hundred per cent loyal to the company, and even business chiefs outside the company but associated with it are under its control.

Direct transactions are the most common form of trade between businesses. A company chooses a business partner from among a mass of potential partners, and then trading conditions are decided on. This system produces latent competition between businesses, but it cannot be said that the market mechanism functions fully in it.

Big business and the banks

In order to choose their partners in these direct transactions, companies join up in associations of two main kinds: keiretsu (groups of affiliated companies) and conglomerates (large industrial groups). Conglomerates are large corporations linked horizontally, each one having many affiliated companies. The companies within each conglomerate are interdependent via cross-holdings. A club of the managing directors of the main companies meets regularly. Business between the companies within the conglomerates is coordinated by sogo shosha (trading companies), which play a pivotal role.

Whereas trade within the keiretsu results from a unilateral decision by the parent company, in the industrial conglomerates it is carried out between big companies on a reciprocal basis. This system does not totally exclude outsiders nor apply to all transactions, but the fact remains that the mechanism of the market economy as described in neoclassical economic theory does not function here.

"A business without a lead bank does not exist," they say in Japan. As a rule, this bank is the main provider of capital for its business partners, for which it is responsible. If the latter go bankrupt, the bank accepts responsibility for their debts and acquires the bonds it has issued. It is also a major shareholder in these businesses, which have shares in the bank. So this is a system of cross-holdings.

For the keiretsu, the conglomerates and the lead banks, share ownership is the best way of bringing companies together. In Japan, banks and finance companies own almost 70 per cent of the shares in all companies quoted on the stock market. Share ownership is limited by an anti-trust law, however. The banks are not entitled to hold more than 5 per cent of the shares issued by a company.

Companies hold shares in each other in order to exercise mutual control and create the conditions for long-term trading between them ("compulsory" trading which flies in the face of the principles of the market economy). But this is also a way of preventing take-overs through share purchases by outside companies. After the liberalization of capital movements in the 1960s, big Japanese companies organized large-scale stability operations by their shareholders in order to prevent foreign capital from taking over their companies.

Business and the state

These operations had some harmful effects on the health of companies and particularly made it more difficult to restructure them. The banks and the big companies were overcome by a fever of speculation in shares and land. A monetary "bubble" appeared and grew until it burst in the early 1990s when there was a sudden collapse in share and land prices. The decline of Japanese company capitalism had begun.

Japan is said to be ruled by a troika comprising the political world, the higher civil service and the financial world. In this context, the financial world means the grouping of big business leaders, who dominate the economy and are linked to the state, which has made possible the strong growth of the Japanese economy by giving priority to business and setting up many aid and protection policies.

This policy to encourage the development of private enterprise in the finance, services and other sectors has often been implemented via administrative directives, independent of legislation, and this has given Japanese bureaucrats far-reaching powers. The troika system has led to financial support being given to a political party and to appointments for top civil servants in the private sector, where they embark on a second career. These links have led to collusion between politicians, higher civil servants and business, which has given rise to scandals and corruption (and is, in principle, alien to the mechanism of a market economy).

Compared to countries with a socialist tradition such as the Soviet Union and China, and to the countries of Western Europe, the economic clout of nationalized industries in Japan is relatively light and the state sector is less important. In this respect the Japanese economy is a market economy and not a planned economy. It could, however, be described as a market economy directed by the state since private business is so closely tied to the state.

A turning point

In addition to these internal contradictions are the problems raised by the direct investment made by Japanese companies abroad - in America, Europe and Asia - in the 1970s and 1980s. Japan's trade surplus with the United States has also become a major political problem, and there have been many cases of friction between Japan and the United States in the field of co-operation on Japanese-American structural problems.

Company capitalism is showing its limits. Where relations between business and individuals on the market for manufactured goods are concerned, oligopolistic domination is becoming hard pressed, notably because of the increasing amount of goods imported from abroad. As far as the labour market is concerned, the job-for-life system and Japanese-style recruitment are starting to lose ground. The unions are still company unions and they continue to give priority to the company, but their members are less and less interested and the rate of unionization is going down.

In relations between companies, it can be seen that the justification for keiretsu is getting weaker and that companies are starting to leave them. The need for conglomerates is also starting to weaken now that industrial structures are moving away from the model of heavy industry and the chemical industry. Even the cross-holding system is becoming less widespread.

The institution of the lead bank is also running out of steam. Since the 1980s, the business finance system has diversified. Cross-holding by companies is starting to be a handicap for industrialists, and some companies are selling their shares to generate profit.

With regard to relations between the state and business, deregulation has been a major government trend in the 1990s. After the appearance of splits in the structure of the politics-civil service-finance troika (political scandals, end of single-party domination), it became increasingly difficult to preserve the control system which these three entities exercised by mutual support.

How will the Japanese-style market economy develop? Towards an "Anglo-Saxon" type of market economy or towards something entirely new? I would be inclined to say that the twenty-first century will not be an age of big companies or of joint stock companies. Companies will not disappear as such. They will still even be the mainspring of the economy. But because industrial structures will be increasingly different from those of heavy industry and the chemical industry, big companies involved in mass production will lose ground to small and medium-sized businesses headed by industrialists of a different kind. I see them as being efficiently interlinked by networks and not by the keiretsu and conglomerate system.

Individualism, an unusual phenomenon for Japan, will emerge in relations between businesses and people and replace the principle of company supremacy. A co-operative structure or perhaps some radically different system may take the place of joint stock companies. These companies will not disappear, but maybe they will have to coexist with many other forms of business.

HIROSHI OKUMURA is a Japanese economist.

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