Corporate organisation and structural adjustment in Japan

Abstract

A major feature of corporate organisation in Japan is the existence of keiretsu or financial corporate groupings, centring on financial, shareholding, and trading links among ‘main1 banks, general trading companies and manufacturing firms. This study examines the economics of this form of corporate organisation and its role in Japan’s structural adjustment since the early 1970s, previous analysis of which has focused on the role of government policy and assistance. The financial corporate grouping can be viewed as a kind of internal capital market which allows firms, and indirectly their managements, to pool their risks and obtain insulation from the external market for corporate control. The main bank is a principal risk-insuring agent and functions as a screening, monitoring and management-sanctioning mechanism in the internal capital market. The general trading company performs an important risk-insuring role in the grouping as a financial intermediary in interfirm transactions and as a parent firm to manufacturing firms. The practice of engaging in corporate share interlocks is seen as a set-up which allows firms to pool risks and obtain mutual protection from the takeover market. The internal capital market, by enabling firms to share risks and obtain mutual protection from external takeover agents, is thought of as facilitating the operation of the ‘lifetime1 employment system for managers and other skilled workers in large firms. This corporate organisation has played a major role in the process of corporate adjustment to changing competitiveness and in distributing the costs associated with the scrapping of capacity and other structural adjustment in Japan. The major banks have provided financial assistance to structurally depressed firms on a large scale and main-bank intervention in firms has been a major mechanism through which the reorganisation of corporate assets and management has been carried out in the face of rapidly changing competitive conditions. The general trading company has been a major corporate mechanism through which costs of adjustment have been borne. The disposal of shares held in related banks and business partners is identified as a major mechanism through which firms have been able to offset their losses. Shares have been disposed of on a large scale, with the explicit purpose of offsetting structural change-related losses, and these share disposals have taken place in the negotiated intercorporate context of the internal capital market.A significant part of the thesis is devoted to a case study of adjustment in the aluminium smelting industry, an industry which experienced a severe decline in international competitiveness in the 1970s and which has a group-dominated corporate organisation. The case study shows that, while there have been several important government assistance schemes, corporate organisation has played a major role in mediating adjustment in the industry, particularly in absorbing the costs of adjustment through internal cross-subsidisation mechanisms. The results of the study suggest that the importance of the role of the government, and M1T1 in particular, in bringing about structural adjustment in Japan has been overstated and that this apparent effectiveness in promoting adjustment has rested in large part on the capacity of the private sector to absorb the costs of adjustment.