An Economic Introduction to the Japanese Keiretsu System

The definition, significance, and history of keiretsu in Japan

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In Japanese, the word keiretsu can be translated to mean "group" or "system," but its relevance in economics far surpasses this seemingly simple translation. It has also been literally translated to mean "headless combine," which highlights the keiretsu system's history and relationship to previous Japanese systems like that of the zaibatsu. In Japan and now throughout the field of economics, the word keiretsu refers to a specific type of business partnership, alliance, or extended enterprise. In other words, a keiretsu is an informal business group.

A keiretsu has generally been defined in practice as a conglomeration of businesses associated with cross-shareholdings which are formed around their own trading companies or large banks. But equity ownership is not a prerequisite for keiretsu formation. In fact, a keiretsu can also be a business network of comprised of manufacturers, supply chain partners, distributors, and even financiers, who are all financially independent but who work very closely together to support and ensure mutual success.

Two Types of Keiretsu

There are essentially two types of keiretsus, which have been described in English as horizontal and vertical keiretsus. A horizontal keiretsu, also known as a financial keiretsu, is characterized by the cross-shareholding relationships formed between firms which are centered around a major bank. The bank will provide these companies with a variety of financial services. A vertical keiretsu, on the other hand, is known as a jump-style keiretsu or an industrial keiretsu. Vertical keiretsus tie together in partnership the suppliers, manufacturers, and distributor of an industry.

Why Form a Keiretsu?

A keiretsu may provide a manufacturer the ability to form stable, long-term business partnerships which ultimately permit the manufacturer to remain lean and efficient while focusing mainly on its core business. The formation of this type of partnership is a practice that permits a large keiretsu the capability to control a majority, if not all, steps in the economic chain in their industry or business sector.

Another aim of keiretsu systems is the formation of powerful corporate structure across related businesses. When member firms of a keiretsu are associated through cross-shareholdings, which is to say that they own small portions of equity in each other's businesses, they remain somewhat insulated from market fluctuations, volatility, and even business takeover attempts. With the stability provided by the keiretsu system, firms can focus on efficiency, innovation, and long-term projects.

History of Keiretsu System in Japan

In Japan, the keiretsu system specifically refers to the framework of business relationships that arose in post-World War II Japan after the fall of the family-owned vertical monopolies that controlled much of the economy known as zaibatsu. The keiretsu system joined Japan's big banks and big firms when related companies organized around a big bank (like Mitsui, Mitsubishi, and Sumitomo) and took ownership of equity in one another and in the bank. As a result, those related companies did consistent business with one another. While the keiretsu system has had the virtue of maintaining long-term business relationships and stability in suppliers and customers in Japan, there are still critics. For instance, some argue that the keiretsu system has the disadvantage of reacting slowly to outside events since the players are partly protected from the external market.

More Research Resources Related to the Keiretsu System

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Moffatt, Mike. "An Economic Introduction to the Japanese Keiretsu System." ThoughtCo, Feb. 16, 2021, Moffatt, Mike. (2021, February 16). An Economic Introduction to the Japanese Keiretsu System. Retrieved from Moffatt, Mike. "An Economic Introduction to the Japanese Keiretsu System." ThoughtCo. (accessed January 16, 2022).