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

For Part One go here.

1914 saw the outbreak of the Great War. Japan, though part of the Entente, contributed very little to the military side of things, but this doesn’t mean it was a major player in the war.
Japanese weapon factories manufactured millions and millions of artillery shells for the Allies, Japanese rifles were supplied to the Russian and British armies in large quantities and, most importantly, the zaibatsu-owned shipyards churned out freighters at breakneck speed: in just four years Japan doubled its already large mercantile fleet, without taking into account the ships sold to the Allies. Exports rose by 266% in three years and Japan started turning a large trade surplus, helped by the power vacuum left by British and French companies’ commitment to the war effort (Continental Asia was largely unaffected by the war and still needed industrial goods).
In late 1916, after the Battle of Verdun, Mitsui Bussan analysts concluded (correctly as it turned out) that in three years at most the war would be over with an Allied victory. They concluded a recession would hit Japan hard as demand for munitions would drastically drop and French and British competitors would be back in business. Hence Mitsui started to steadily reduce its transaction volumes almost immediately. Other zaibatsu, thinking Mitsui had some serious internal issue, stepped in to seize what they thought was a golden opportunity. Recession hit immediately after the Armistice in November 1918, as France, Italy and Britain cancelled large munitions orders overnight. Many zaibatsu were ruined or barely survived the hit while Mitsui’s dominating position was strengthened.

This was a momentous event for one peculiar reason: it signaled the beginning of the ascendance of the sogo shosha (literally “trading house”) as the intelligence branch of the zaibatsu/keiretsu. With operations all over the world and overseeing an enormous volume of transactions, the sogo shosha were (and still are) in a unique position to act as the eyes and ears of the keiretsu and evolved an analytical capability to process raw data at a very early date. The success of Mitsui Bussan in correctly analyzing the evolution of the Great War spurred the other zaibatsu (especially Shibusawa) to follow this path. This capability will become critical in the post-WWII period.

The 20’s saw Mitsui position strengthened, while the other Big Four managed to fully recover in a brief period thanks to their financial resources and skilled leadership. Shibusawa grew so much (chiefly thanks to the skills of their sogo shosha analysts) as to almost make the Big Four the Big Five but will have to wait the post WWII period to become one of the top players in Japan’s economy. Second tier zaibatsu largely struggled however: Nomura managed to follow the path of financial discipline and sound investments and as a result became a prominent player among these companies. Nakajima, a very new and highly aggressive zaibatsu, managed to grow thanks to their Army connections: the military discreetly but generously helped them to build Japan’s nascent aircraft industry. But their competitors, caught between the post-WWI slump and the aggressive expansion of US exports [1], largely struggled.

In 1924 a momentous event happened. The fiscally conservative Kenseikai party, generously funded by Mitsubishi, won the election and Count Kato Takaaki became prime minister. Kato set about cutting military expenses and curbing ventures abroad to reduce government expenses and taxation. Kato suddenly fell ill and died of pneumonia in 1926 but his brief government had some momentous effects.
The Army had brought the blunt of the cuts and its leaders never, ever forgave Mitsubishi for this.
Imperialists, who saw Japan’s military venture abroad both as divinely decreed and indispensable to feed the nation and provide it with raw materials, rallied and began to become more vocal and assertive. Some right-wing politicians even accused the zaibatsu of being opposed to war because it would eat into their profits, which was true enough and perfectly understandable but made quite an impression on the public at large.
Even Marxists “intellectuals” (actually Soviet agents and agitators) jumped on the bandwagon and began to berate the zaibatsu for not caring about the plight of the workers.

The Mitsubishi logo, one of the symbols of Japan’s economic power

Zaibatsu leaders were flabbergasted. They considered themselves the greatest Japanese patriots. After all it was through their efforts that Japan had been made secure from foreign ambitions. It was them who had rescued millions from the abject poverty of the Tokugawa era and given them well paid, safe jobs. It was them who had saved the State from bankruptcy in 1880 by providing capitals. It was them who had built the warships and the weapons which allowed Japan to shock the world by defeating Russia in 1904.

Tensions literally exploded in 1932 when, following ferocious attacks from both left and right-wing newspapers, the Mitsui senior executive, Takuma Dan, was assassinated by an Imperialist fanatic. The killer was treated with extraordinary leniency and hailed as a hero in the newspapers. Many executives feared (correctly, as post-WWII research turned out) the police and the Army would not protect them from the same fate that befell on Takuma-sama.

The zaibatsu reacted like the Tokugawa supporters in 1868: by means of bribing and fast talking. Many groups made tenko (public conversions) in which they proclaimed their commitment to the militarist and Imperialist cause. It was during this period Mitsubishi strengthened its relationship with the Navy [2], seen as much more reasonable than the “Army hotheads” and, due to its tremendous political power, capable of providing some measure of protection.

However, the “Army hotheads” who were gaining growing political power in Japan didn’t buy into the tenko. They knew the zaibatsu were just paying lip service. They wanted companies that did what they wanted and backed their aggressive expansion and military adventures in China at every step. This opened the door for a group of companies called “the new zaibatsu”. These new zaibatsu differed in a number of ways from the Big Four: for example they lacked a core family business (banking for Mitsui, mining for Sumitomo, shipping for Mitsubishi and insurance for Yasuda) and were heavily weighed towards heavy industry, exactly what the Army wanted.

The most important of these new zaibatsu was Nippon Sangyo, or Nissan [3]. It was born from the ashes of a bankrupt, second tier zaibatsu which didn’t survive the post-WWI slump and its leaders took advantage of their Army connections to secure financing to massively expand in the heavy industry sector.

However these new zaibatsu lacked the financial solidity and the experienced management of the Big Four and, more crucially, they felt compelled to satisfy all the Army’s whims, even if this meant losing large sums of money. By 1939 most of them were flirting with bankruptcy. However by this stage the “Army hotheads” had more or less complete control over Japan and their threatening moves frightened The Netherlands into embargoing the Indonesian oil on which Japan depended for a sizable part of her needs. The seeds for World War II were sowed in the Pacific.

There’s no need to cover in depth what happened to the zaibatsu (and Japan) during the war. Suffice to say the Japanese industry proved no match for the American one: not only the latter was much larger, more advanced and better organized, but it had ready access to enormous quantities of raw materials while the zaibatsu depended on imports which were easily cut off by US Navy submarines and air power.

In 1945, after the Japanese surrender, General Douglas MacArthur took a strong stance against the zaibatsu. He personally ordered the members of the old zaibatsu families removed from their offices, banned from any managerial or political position and, in what can only be described as an act of petty vengeance, had all their personal assets confiscated. He also ordered a number of zaibatsu to be broken up and put the others under close surveillance [4]. But the straw which broke the camel’s back was his insistence that even the rest of the old zaibatsu management, down to the most junior positions, be given the same treatment as their superiors. MacArthur’s stated goal was not to prevent a Japanese rearmament, but to break Japan’s back, destroy any capability for industrial reconstruction and turn the island in a completely dependent American buffer State. In short he aimed at avenging the humiliating defeat the Japanese had inflicted upon him in 1942, when he was forced to flee from Bataan on a submarine in the dead of the night.

Either through chance or design (there were already many in Washington, especially in the Department of State, who felt MacArthur was getting out of control), this last part of his plan didn’t come into being. The purge was to be conducted through the Ministry of Finance and the newly formed Ministry of International Trade and Industry (MITI) [5]. Japan’s prime minister, Yoshida Shigeru, simply ordered the bureaucrats to “freely translate” MacArthur’s edict. They rewrote the edict extensively and, in the end, only a handful of directors were “purged” and most of them were rehired in a very short time.
Yoshida rightly felt these men were an irreplaceable asset: most of them were excellent analysts and engineers who had “worked their way up” in the zaibatsu and their experience and skills were sorely needed to rebuild Japan.

After this last act of vengeance, orders quickly came down from Washington for MacArthur to loosen his grip on Japan. The Truman Administration was seriously worried an impoverished and humiliated Japan may be pushed in the Soviet orbit, thus losing the US what was felt to be as indispensable client State in the Pacific. These worries turned into a veritable panic in 1950.

The previous year Mao’s People’s Liberation Army finally defeated Chang Kai-Shek’s Nationalist troops and forced the survivors to flee to Taiwan. And in 1950 Kim Il-Sung’s Soviet-made tanks routed Syngman Rhee’s lightly equipped forces with frightening ease, forcing the US to require a UN-led military mission to save the Republic of Korea. It seemed like Stalin was about to overrun the whole of Asia.

The Korean War was the turning point for the Japanese economy. As this was seen by the Truman Administration as nothing more than a side show for the big confrontation with Stalin’s USSR, the US economy was not mobilized to the same degree as in WWII. The US was ready to supply weapons, but weapons are only a small part of what armies need. Armies need blankets, tyres, spare parts for their lorries, bandages, typewriters… and in the whole of Asia only Japan had the potential to manufacture these items in the quantities required.

An assembly line at the Fuji Heavy Industries (formerly Nakajima) Fukoda works during the Korean War boom

Once MacArthur left Japan to take command of UN forces in Korea (much to the relief of the locals), Washington proceeded to abolish most of the controls the general had put in place and also placed massive orders for her own troops and those of her allies. This initiated a boom for the Japanese economy, a boom which ended with the Armistice in 1953 and whose bust bankrupted a large number of company.[6]

[1] This post-WWI export boom was fueled by the frenzied foreign bond market in the US. In short the US lent the rest of the world dollars with which to buy American products. The system came crumbling down in 1929.

[2] The Imperial Japanese Navy (IJN for short) carried a weight in Japanese politics far in excess of her own role as the naval branch of the armed forces. The IJN was constantly at loggerheads with the Army and this heated inter-service rivalry has become the stuff of legends. There was no love lost among the two: the Army considered the IJN a sort of club for technocrats and haughty high society members while the IJN reciprocated by considering the Army the refuge of society’s rejects.

[3] The present day Nissan car manufacturer is only tenuously connected with the original Nissan zaibatsu. It’s partly owned by Renault of France and it has strong ties with the Fuyo (Yasuda) keiretsu, which is currently being absorbed by Mitsubishi.

[4] Nissan or Nippon Sangyo was one the zaibatsu broken up by MacArthur. It was split in various branches such as Nissan Motors, Nissan Chemical Industries, Nippon Mining and Hitachi which were forbidden from reforming their pre-war ties.

[5] MITI was formed around the wartime Ministry of Munitions to manage both Japan’s industry and international trade. Originally envisioned as a means to tightly control the Japanese economy, it quickly morphed into a powerful promoter of Japanese exports.

[6] Honda Motor Co came very close at going under in 1953. It was only saved by a large emergency loan from Mitsubishi and a last-second agreement between workers and management.

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