Beneath The Kimono

The business groupings that once made Japan great, aren’t working any more.

For my host in a typical Tokyo karaoke bar, there simply was no choice about what beer to drink: Asahi Super Dry. It was the late 1980s and “Sam”, my guide from Sumitomo Bank, was taking me, and several colleagues, on a tour of Japan as we cemented our potential business relationships.

The beer choice was dictated by the fact that both Sumitomo Bank and Asahi Breweries were both members of the same Keiretsu, or business group, which reformed after the second world war to form the foundation for the post-war “economic miracle” in Japan. This was a business model that I grew up with. It seemed to both prevent competition, particularly hostile takeovers of Japanese companies, and also provide a degree of mutual benefit to member companies and the banks at their heart.

The recession of the 1990s began to undo all that, as many of the biggest banks were hit very hard by their large portfolios of bad loans. Sumitomo Bank merged with Mitsui Bank at the time, along with other similar deals, blurring the edges of these business groups. At the same time, companies such as Sony, which had grown up outside this trading system, began to outperform those within it. What had once been central to Japan’s economic growth was now in the way.

The amount of cross-shareholding that underpinned the Keiretsu system has fallen drastically from more than 50 per cent in the 1990s to just 17.6 per cent today, according to Nomura research. As a consequence, the role of such close financial investors has declined it seems, although one company that didn’t dissolve its cross-shareholdings was Olympus.

Olympus is the great scandal of the moment in corporate Japan. People are being arrested as the cover-up of about £1 billion of losses on acquisitions over the preceding five years is being fully revealed. It has even been suggested that organised crime was involved. While there has been much fuss about the shame being brought on the country by some, Olympus’s biggest shareholders – Sumitomo Mitsui Banking Corporation among them – have been rather quiet about it all.

It seems that there is now pressure on several fronts for greater transparency than there once was in corporate Japan. The new reliance on capital markets to fund Japanese business is driving this, with 27 per cent of the shares listed on the Tokyo Stock Exchange now being owned by overseas investors.

The traditional way of doing things no longer seems to be working very well in Japan.


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