Summary: What was Japan's Lost Decade? How Did it Happen?
Original Article Written by TheStreet, published December 12, 2022
Keiretsu: a Japanese organizational structure composed of operationally independent entities, organized vertically or horizontally, that have formed an alliance and an invested interest in one another. While the most prominent entities within each member group can influence smaller, reliant entity members, each can act as research and development modules for each other and as the supply chain, lender, and insurer (Twomey, 2019).
Bubbles. They all pop, eventually.
Japan was deflated after the second world war. Its national pride was hurt, and its agriculture primarily supported its economy. However, by the 1980s, Japan found a way forward and became the world's second-largest economy. "People sported Sony Walkmans" and "drove Japanese cars around town." Children could find Japanese cartoons watched on televisions made by Japanese manufacturers.
Japan's businesses reached their height by structuring themselves with a concept called keiretsu, "a close-knit network of business interests centered around a main bank." The companies took majority interests in each other instead of being publicly financed. "This 'socially-controlled' investment provided the perfect conditions" to research and develop ideas and products before being shared with a broader market. Companies such as Mitsubishi Group were a conglomerate made up of its own financial institution, an insurer, and other subsidiaries with the resources and ideas to self-generate - "essentially acting as its own supply chain."
The Japanese Ministry of International Trade and Industry credits the success of the 1970s and 1980s with the keiretsu business concept and a period where these businesses were protected from foreign competition. This sheltering allowed companies to grow into dominating powerhouses with the confidence and resources to expand their export strategies to the broader global marketplace, "which is how Japan's electronics, computer, automotive, and aircraft industries grew so quickly."
"It was said that one square mile in Tokyo's government center was worth more than the entire state of California, (TheStreet Staff, 2022)."
With the growth of these industries, Japan's stock market also benefited and experienced growth. The Nikkei Stock Average "hit an all-time high of 38,916 on December 29, 1989." Real estate also grew more valuable - "commercial land prices rose to over 300% between 1985 and 1991." However, as we experienced in the US in the lead-up to the 2007-2008 financial crisis, "as asset prices grew, so did speculation," especially in real estate. "Banks were lending and not looking twice. Sometimes, collateral was not even required, (TheStreet Staff, 2022)."
And, oh, how it popped.
As the Bank of Japan started steep interest rate hikes to slow the swell, speculators quickly defaulted on their investments, and several of Japan's largest keiretsu banks began to fail, " threatening to take entire industries down with them." With resources at their member banks becoming less attainable for the companies that made up the keiretsus, they began looking for funding outside of their keiretsus, which resulted in many companies taking on more debt than they could handle.
Only one year after the Nikkei hit its all-time high, it lost 43% of its value by December 1990. And so Japan entered a decade-long deep recession between 1991 and 2001.
They tried their best to right the ship, but nothing seemed to work:
Interest rates were slashed to zero.
Which caused land prices to drop "15% in some of Japan's largest cities, which meant homeowners owned more than their homes were worth."
The government instituted large-scale stimulus packages.
This added to the country's deficit and created more jobs for projects like repairing bridges and building new roads, "even when they weren't completely necessary."
Many investors were holding onto their purse strings with a tight grip, essentially forming a liquidity trap with such a poor outlook in mind for the economy.
A quantitative easing program by Japan's central bank to increase liquidity in the market by buying many government bonds from the nation's largest banks to stimulate the economy eventually helped Japan pull out of its financial troubles.
China is also credited with boosting Japan's economy by entering the global market and exporting goods that rely on parts made by Japanese manufacturers (TheStreet Staff, 2022).
Pros and Cons of Keiretsu:
Pros:
Members exercise similar business best practices and establish like standards.
They reduce their exposure to risk by managing most variables within their groups.
Costs are reduced, related to souring products and parts, as members contribute to one another as a closed-loop supply chain.
Each member holds each others' shares through cross-shareholding (which fends off hostile takeovers).
Information sharing within each member group has shown an increase in efficiency and productivity.
Horizontally formed keiretsus have a trading company as a member that coordinates trade within the group and among outside independent organizations and foreign groups. Horizontally formed groups can seek funding outside their group and are not bound to use their member bank exclusively.
Cons:
Risk of borrowing beyond a company's means by having funding resources within arm's length through its member bank.
Larger member groups are slower to respond to market changes, as one member may need to make a decision while seeking approval from other members, or technology shortfalls may bind them.
This system can also emulate monopoly ventures and appear to exhibit insular tendencies.
When organized vertically, extremely large keiretsus can be comprised of members who may not be aware that they are affiliated with certain other entities at the top of the group. And members at the top may not be fully aware of the smaller entities that sit along the bottom of their group.
The future of keiretsu as we know it now may be subject to change, especially given the ever-growing global economy and the speed at which business moves in these modern times. Keiretsus may need to adapt to build a successful future.
Examples of Keiretsu:
https://corporatefinanceinstitute.com/resources/management/keiretsu/ (Keiretsu, 2022)
References:
Keiretsu. (n.d.). Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/management/keiretsu
Liberto, D. (2019). Keiretsu Definition. Investopedia. https://www.investopedia.com/terms/k/keiretsu.asp
TheStreet Staff. (2022, December 12). What was Japan's Lost Decade? How Did it Happen? [Review of What was Japan's Lost Decade? How Did it Happen?]. TheStreet. https://www.thestreet.com/dictionary/j/japans-lost-decade
Twomey, B. (2019). Understanding Japanese Keiretsu. Investopedia. https://www.investopedia.com/articles/economics/09/japanese-keiretsu.asp
III, J. H. (1991, December 30). 1991 Trivia, Fun Facts and History. Pop Culture | History | Facts | Trivia. https://popculturemadness.com/PCM/1991/1991-trivia-fun-facts-and-history
