At the Heart of Japan’s Success and Failure: the Keiretsu-Part One

In July 1853 a four ship US Navy squadron commanded by Commodore Matthew Perry entered Edo Bay. Perry put on a terrifying show to prove the devastating power of Western technology by razing a number of buildings in Edo harbor. As a result Japan, an “isolationist” country, opened up to the world. Or so it’s what school textbooks say.

Starting in 1633 the shogun, Tokugawa Iemitsu [1], issued a number of edicts collectively called sakoku (chained islands) to reduce to the minimum contact between Japan and outside world. Trade was heavily regulated: for example the only Western traders allowed to operate in Japan were Portuguese, replaced in 1641 by the Dutch, and they could only deal with Japanese on the artificial island of Dejima in Nagasaki Bay, Chinese traders could only operate in a specially designated area inside Nagasaki proper, and so on.

There were two reasons for this politics. The first was the traditional Japanese distrust towards foreigners, particularly Mongols and Chinese, which went back to the two failed Mongol attempt to conquer Japan in the XIII century. The second, and much important, was the Tokugawa grand plan to keep an iron grip on the country, part of which keeping their subjects as isolated from external ideas and influences as much as possible. This extended to the military side of things: while modern mythology has turned Japanese warriors of this period into invincible superheroes capable of unbelievable feats of arms, Tokugawa Japan was a pathetic military entity, a far cry from the powerful Japanese hosts which threw the Mongols back into the sea to be finished off by the kamikaze.[2] This will soon become a critical fact.

In the XIX century the Tokugawa started to feel increasingly threatened by Western powers, which were circling China like a pack of hungry wolves. Japan could be next.
This was confirmed by the frightening ease with which the British defeated the Chinese during the First Opium War (1840), and the Tokugawa knew Manchu forces were far more numerous and better equipped than their own.
Instead of physically beefing up defenses, a ferocious debate ensued about how to better defend Japan, by either relying on traditional methods of warfare or modernizing the armed forces. The traditionalists won out: Japan was to be defended by heavily armored knights and musketeers armed with completely outdated firearms. Students who had been sent (by the shogun himself) to the US and The Netherlands to learn about modern metalworking and weapon-making techniques found themselves under house arrest upon their return and a few were even put to death on fabricated charges.

Perry’s show of force threw the shogunate into a veritable panic. The samurai knight with his traditional armor was no match for the devastating explosive shells used by the Americans. The Japanese immediately turned to the Dutch and literally begged them to start selling all the modern European weapons they could find. Envoys were sent to The Netherlands asking for a military mission to be sent to Japan to open a naval academy and teach Japanese engineers how to build steamships.
When Perry returned in 1854 the Japanese understood they had to buy time. They negotiated and agreed to the so called Treaty of Peace and Amity. Trade was still to be conducted through either the Dutch or the Chinese but the shogunate allowed US ships to enter Japanese ports to buy supplies, accepted the arrival of a US consul and guaranteed shipwrecked American sailors would be well treated and returned to their country.

In 1856 the Second Opium War broke out between Manchu China and Britain and France. The US consul, Townsend Harris, approached shogunate officials with a proposal. It was obvious France and especially Britain would turn their eyes on Japan once they were done with China and the poorly equipped Japanese forces didn’t stand a chance against them. The US government was ready to help… in return for a few favors. These “favors” were the opening of a number of ports to American traders, low import-export duties and the ability of US citizens to live at will in Japan. In return the US would sell weapons, warships and other military materials at much reduced prices and with the highest priority over other customers. The desperate Japanese signed the treaty. This was followed by similar treaties with The Netherlands, Britain, Russia and, more critically, France: after the American Civil War broke out in 1861, France replaced the US as the foremost foreign power in Japan.

This initiated a period of deep turmoil for Japan as the so called traditionalists, generally backing the Tokugawa, battled (often quite literally) those who struggled to to modernize Japan, one way or the other. “Rebel” armies equipped and drilled in European fashion (usually by French military advisers) proved to be unbeatable, effectively dooming the cause of the traditionalists and the Tokugawa.

In 1867 Emperor Komei, a weak figure, died and was succeeded by his fourteen year old son, Prince Mutsuhito. Despite his very young age, Mutsuhito already had very clear ideas. His tutors and teachers had imprinted upon him from a very tender age how the Tokugawa, originally the Emperor’s servants, had taken power from his line and turned the Emperors into little more than religious figureheads.
This needed to stop. Mutsuhito immediately threw his lot with the reformers, giving them his support and his blessings. In 1868 a joint Imperial-Reformist force took Edo (soon to be renamed Tokyo), the Tokugawa’s capital, and Mutsuhito quickly moved there from the ancient Imperial capital of Kyoto. The Meiji Era had started. [3]
While much has been written about Mutsuhito, it’s obvious that his views were almost the same as those of the reformers. He wanted a strong, modern Japan which could defend himself from foreigners and grow wealthy through industry and trade.
Unfortunately for him and his newly found allies, things didn’t turn out too well at first.

Emperor Meiji (1852-1912)

The Meiji government took modernization in hand in 1868 already. The fulcrum of this modernization was to be State action. Meiji officials scrambled to buy technology, build factories and hire foreign “experts”, often at extravagant rates, to run them.
Obviously the system was abused from day one: just to give an example Meiji officials hired dozens of French loubins (wolf hunters) to exterminate wolves with “modern” methods (chiefly strychnine-poisoned baits), paying each of them a hefty salary and all expenses. While they were undoubtedly effective, the operation cost so much many wondered if it had been worth it.

By 1880, the Meiji government was by all effects bankrupt, having spent fabulous sums in military and industrial modernization and often ending up grossly overpaying whatever shrewd Westerners were selling. This led to what can only be called one of the most massive fire sales in history: the Meiji government put up silk factories, mines, shipyards, steel mills and infinite other State-owned activities for sale, often at incredibly low prices, to avoid a complete meltdown.
However, capital in Japan was relatively scarce at this point so there were only two groups of people who could benefit from it.

The first steam-powered gunboat built in Japan, the Chiyoda.

The first was made up of those ancient clans which, having grown rich and powerful under the Tokugawa, managed to avoid the purges of the Meiji Restoration by massive bribing and fast talking. Chief among them were the Mitsui and the Sumitomo.
The Mitsui were originally textile merchants who extended their business in that ancient and hateful practice, tax farming. They grew so powerful and indispensable for the Tokugawa they were even allowed to issue their own currency, bearing the Tokugawa’s heraldry (the Hollyhock), a unique privilege.
In 1876 they opened Mitsui Bank, which became the dominating Japanese bank for decades, and the Mitsui Bussan trading company. The latter managed to single-handedly wrest control of Japan’s international trade from foreign merchants, winning the Mitsui clan many friends in government circles.
The Sumitomo were the Tokugawa’s official and sole copper suppliers. They run the government-owned mines, refined the ore and supplied the shogunate with copper ingots. In 1868, probably by means of bribing, they were given property of most of the mines they had previously managed for the State. With these revenues they launched a shipping concern and a huge warehousing business. Due to their very conservative leadership, they entered into the highly profitable banking business only much later (in the 1890’s), something that slowed the clan’s economic growth considerably in this early period.

The second group is much more interesting to us. This was made up of “self made men”, proper capitalists. Among the most momentous reforms of the Meiji Restoration was the abolition of the caste system and all sumptory taxes. This opened an incredible window of opportunity for individuals and families who, until then, were kept in check by the tight caste system and oppressive regulation.
Three concerns became prominent in this period: Asano, Yasuda and Mitsubishi.
The founder of the Asano dynasty, Soichiro, was a charcoal and firewood seller who arrived in Tokyo with a grand total of 33 yen in his pocket. After the government fire sale his assets were worth 35 million yen and comprised two banks, a trading company, a cement factory, two steel mills, a shipyard and a shipping concern.
The Yasuda were small moneylenders who, due to the caste system and oppressive regulation, were never allowed to “make it big” under the Tokugawa. After the Meiji Restoration the Yasuda quickly opened a bank, which became the country’s second after Mitsui in a matter of four years. The Yasuda specialized in finance and came to be the most important players in the insurance business.
But the most interesting of them all, old or new, was without question Mitsubishi.

Mitsubishi’s early history deserves to be told. A few years after Commodore Perry made his show of force in Edo, a daimyo (feudal lord) sent a very young, low-ranking samurai as his agent in Osaka. His name was Iwasaki Yataro. In 1871 his master turned his business in Osaka into a private operation and put Iwasaki in charge. In a short time he had saved enough money to buy out the business and set up a firm with some other ex samurai, left with little to do after the abolition of the caste system. This firm specialized in shipping and was named Mitsubishi Steamship Company (Mitsubishi means “Three Diamond Shapes” and was the insignia of his former master). Headquarters were moved to the new Imperial capital of Tokyo. Iwasaki was young, cocky, eager to expand his business and very good at his job.

Iwasaki Yataro, founder of Mitsubishi (1835-1885)

In 1874, Japan prepared to launch its first modern military expedition against Taiwan.[4] It had a well trained and modernly equipped army but no navy to carry it overseas, hence the Meiji government “requested” the State-owned YJK navigation company to carry the troops over to Taiwan.

YJK could be taken as the example of what happens when a government tries to meddle directly in any business, only to fall flat on its face.
YJK had been set up to wrest control of shipping to and from Japan from two foreign firms, one American and the other British, which had a de facto duopoly. It used government-owned ships, government funds and money coerced from a number of former Tokugawa supporters who had not been able to bribe their way out of it. It was run by government officials and a number of these coerced individuals. Of course the government officials, having been picked for their loyalty to the new regime and not their skills, had no experience in intercoastal shipping, let alone long distance trading using modern steamships. And the former Tokugawa supporters had no interest in the venture and spent all their time attempting to bribe their way out.

So when Meiji officials made their request, the YJK management declined. This was a complete embarrassment: what would France, Britain and Russia think when they heard the Japanese army was camped near Yokohama in full battle gear and with nowhere to go? In desperation, they turned to Iwasaki, who was already known for never turning a job down. No problem, he said, I can do it.

Mitsubishi ships carried Japanese troops to Taiwan and back without a hitch. Meiji officials were highly impressed by this display of efficiency so, when YJK went into serious financial difficulties in 1875, they turned the other way and “tipped” Iwasaki he could buy as many ships as he wanted at rock-bottom prices. He did so and by the end of 1876, using these ships, Mitsubishi had forced its British and American rivals to abandon the highly profitable Shanghai-Yokohama route.

At the great fire sale of 1880, Iwasaki concentrated on steel mills and shipyards. Due to a petty personal squabble with a minister, he was however forbidden from either buying a government-owned bank or founding a new one. Being the resourceful businessman he was, he just bought a private one, renamed it Mitsubishi Bank and expanded its operations.

These new, privately owned groups which emerged from the fire sale of 1880 are known as zaibatsu. In ascending order of importance the Big Four were Yasuda, Sumitomo, Mitsubishi and Mitsui. Under these there were a number of less important but still very large and highly profitable zaibatsu: Asano, Furukawa, Fujita, Nomura and Shibusawa (also called Dai-Ichi).

Now, in post WWII Japan the zaibatsu have long been seen as a source of embarrassment because American propagandists forced upon the country the idea the zaibatsu were “evil” for being the root cause of Japan’s military ventures abroad in the XIX and XX century. Of course this is an absolutely ridiculous idea (as will be later proven) but the idea stuck on and to this day conglomerates such as Mitsubishi will go to incredible lengths to deny any connection with the zaibatsu, despite being nothing more than their direct descendants. The situation started to change in the ’90s but to this day it’s considered impolite in Japan to publicly associate the name of any present conglomerate with the word zaibatsu.

[1] The office of shogun (officially sei-i-taishogun “great general who subdues the foreign barbarians”) was originally military in nature and indicated the supreme commander of the Japanese armed forces. Through most of Japanese history, shogun were the de facto rulers of the country. Technically the Emperor had to appoint the shogun, but in reality the office became hereditary, with various powerful families fighting ferociously for the office. The Tokugawa seized it after defeating their rivals at the Battle of Sekigahara (1600) and forging a family tree claiming their descent from the great Minamoto yo Noromitomo, an extremely powerful shogun of the XII century.

[2] The Tokugawa reforms cynically weakened the Japanese military to prevent any revolt against them by disaffected nobles. Small numbers of highly trained heavy knights (belonging to the samurai caste) and professional musketeers (to which the Tokugawa owed their victory at Sekigahara) were tasked with mainly one task: put down peasant revolts. For this task there was no need of sophisticated tactics or highly advanced weapons. To make this policy more effective the Tokugawa cruelly pursued the complete disarmament of the general population.

[3] Upon coronation, a Japanese Emperor (tenno) gives a name to his rule. Upon his death, this becomes his name. This tradition was initiated by Mutsuhito himself who, after his death, became known as Emperor Meiji and his rule is called Meiji Era or Period.

[4] This was a punitive expedition which followed the 1871 murder of 54 shipwrecked fishermen by Taiwanese Paiwan natives. In itself it was a small affair (less than forty dead in all) but China’s military and political weakness opened the door for the First Sino-Japanese War (1894-5).

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