The authors of this curious book state their purpose at the very beginning: "We try to explain how our colleagues in Japanese and American universities came to invent, embroider and propagate those tales of Japan they hold so dear." Further, "the tales in the West about the Japanese economy are not exaggerated. Nor are they biased or misleading. They are simply wrong, fictitious accounts with no basis." In one splendid sweep, all earlier studies of Japan are dismissed and we must depend on Miwa and Ramseyer to tell us what is truly the case with the Japanese economy.
The focus of the book is Japan's keiretsu. But the authors provide no useful definition of the term; in fact, keiretsu means 'series', 'system' or 'order'. In economic terms, it is translated as 'enterprise groups' and is applied to all manner of enterprise. The authors do attempt a kind of definition: "If you know one Japanese business word, you know keiretsu, those massive corporate groups such as Mitsubishi and Sumitomo." But having offered this, they then categorically state: "There are no keiretsu and never were." Odd, as they have just identified two.
Sumitomo remains an active group, with Sumitomo Corporation making a particular point to staff and clients of the history of the Sumitomo companies, just as Sumitomo Chemical and Sumitomo Electric Industries continue to identify themselves as group members. As Mitsubishi Motors was sinking under appalling mismanagement, the various companies of the Mitsubishi group repeatedly provided refinancing.
Again, Hitachi takes in a half dozen or so major companies traded on the Tokyo First Exchange and includes at the last count some 1,200 subsidiaries and affiliates. Sony, much newer to the game, also has 1,200 subsidiaries and affiliates. Surely, these are enterprise groups. Japan's is a networking society; enterprise groups will continue, as will entirely independent and maverick firms in so complex an economy.
Although the authors focus on the keiretsu 'fable', they also list what they claim to be additional fables. The process is really one in which Miwa and Ramseyer create straw men and then proceed to destroy them. The approach is to state a position with which they claim every student of Japan agrees and then to declare that this position is quite simply wrong.
For example, they state that Japanese companies were equity-financed with no significant bank dependence. "Japanese firms maintain substantial equity capital - roughly comparable to the funds US firms raise there." Pre-World War II data is employed to support this view, but in capital-short, high-growth post-war Japan, bank borrowings were by far the most important source of funding - and debt is less costly than equity.
By the mid-1970s, the ratio of debt to equity of Japanese firms was 6:1 and 95% of the debt was bank borrowings. No surprise then that banks rather than shareholders held effective control of companies. US companies could not obtain borrowings of this magnitude (or funds at so low a cost). In the post-bubble 1990s, more than half of the cashflow of companies went to pay off bank debt since both the companies and the banks were effectively bankrupt as asset values collapsed and non-performing loans became a central concern in the economy. With this, the main bank did in fact become a 'myth'. It had earlier been a critical reality.
The authors offer some odd business views - for example, "in a hostile takeover, a would-be acquirer obtains the target shares by paying target shareholders a premium. In the merger, it does so by bribing target managers to deliver the firm." Mergers are common in Japan, while acquisitions are few - but the notion that bribes are paid to effect mergers is quite simply nonsense. Or again, "cross-shareholding arrangements do not exist and never did". Thorough analysis of 2,600 Japanese companies over several decades shows clearly that cross-shareholding hit about 20% of total shares outstanding through to about 1990, with a decline since as shares were sold to obtain cash, increasing again now as a measure against hostile takeovers.
It is difficult to make out the purpose of this book. No effort is made to analyse the changes of the past decade in business practices. There are, of course, myths about Japan, but this dismissal of all prior reviews is hardly helpful in understanding the rich complexity and great success of the Japanese economy.
- The Fable of the Keiretsu: urban legends of the Japanese economy, Yoshiro Miwa and J Mark Ramseyer, University of Chicago Press, £20.50, ISBN: 0-22653-270-4.
- James Abegglen is the author of 21st Century Japanese Management: new systems, lasting values (Palgrave Macmillan, 2006).