Like in other developed nations, Japan's central bank (BOJ) has issued loans to companies at risk of collapse during the pandemic. Many small- and medium-sized enterprises saw demand evaporate throughout the outbreak as customers largely staid home. Owing to social distancing and consumer anxieties, the services industry was particularly hard hit. For operations such as these, BOJ loans are a lifeline.

Nevertheless, loan programs appear to have unintended—and undesirable—consequences. According to analysts, excessive lending may lead to the creation of “zombie firms,” indebted and unprofitable companies dependent upon government assistance, if relied on too heavily during the economic downturn.

Due to its unique socioeconomics, Japan is sensitive to the type of “economic rot” these entities imply. A cultural reservation against layoffs further burdens corporate productivity, while pushing down profits and wages. All of which are occurring during a labor shortage as the percentage of retirees reaches new highs. Unfortunately, zombie firms are hoarding labor that could be better used elsewhere in the economy. Furthermore, monopolistic practices may be perverting the price of goods.

Yet, such a situation is hardly surprising in the land of the rising sun. Since at least the Meiji period, the government has provided serious economic guidance, heavy-handedly influencing how industries throughout the country developed. While this influence fueled rapid development and the "Japanese economic miracle,” excessive government meddling, in the form of mandated lending, likely contributed to a bubble and the economic malaise of the 1990s. For better or worse, this orchestrated interplay between the government and industry has a long history that continues to this day.

The History of Zaibatsu

The 1868 Meiji Restoration of Japan saw the imperial rule of the Emperor restored. This political shift occurred in the aftermath of the Perry Expedition, which opened Japan to trade. Around that time, ruling parties in Japan feared colonization by technologically-superior Western powers and sought to industrialize rapidly. Towards this end, Japan consolidated governmental powers and established a state-guided capitalist economy.

Hoping to emulate the success of the Rockefellers and JP Morgan in the West, the Meiji government also established powerful conglomerates centered around prominent family-owned holding companies. Known as zaibatsu, the government subsidized the sale of industries to these corporate entities. The original “big four” zaibatsu included Sumitomo, Mitsui, Mitsubishi, and Yasuda—familiar names in corporate Japan.

Prior to WWII, the zaibatsu grew to become massive entities. Vertically and horizontally integrated across numerous industries, they controlled extensive supply chains and raw materials.

These conglomerates' strict integration and government relationship also allowed Japan to industrialize quickly throughout the late 19th and early 20th centuries. Nevertheless, their close ties to the government and military led to their dissolution in the aftermath of WWII. After occupying forces left in the country in 1952, they would again reform as keiretsu.


In modern-day Japan, there is a close relationship among industrial and financial sectors as well as the government. In line with a cultural tendency towards cooperation, businesses and other economic entities are closely integrated, often comprising corporate groups known as keiretsu. Like zaibatsu, keiretsu are horizontally and vertically integrated across supply chains. They also incorporate generalized trading companies known as sogo shousha.

Due to their close-knit structure, these economic groups are influential and, by and large, efficient. They provide significant economic stability while helping to disseminate knowledge and know-how throughout Japanese industries. Many economists also attribute the country’s rapid economic growth throughout the 20th century to these conglomerates' productivity.

Indeed, keiretsu influences make many a household name. While Sumitomo and Mizuho are familiar to most, perhaps the Mitsubishi group is the most well-known. The conglomerate is centered around The Bank of Tokyo-Mitsubishi, one of the largest banks in Japan. Mitsubishi Motors, Mitsubishi Trust and Banking, and Meiji Mutual Life Insurance Company are also notable players in this keiretsu. Together with the Mistsubishi Shoji trading company, the group is a major player in international business and finance.

Cross Shareholding

Yet, criticism of these conglomerates is not hard to come by. Most pertinent, countries like the United States have accused keiretsu groups of unfair business practices aiming to shut down foreign competition. Adding to monopolistic tendencies, their massive structure can limit the Japanese economy's ability to progress and innovate.

This is likely by design. The keiretsu came into being during the 1960s and 1970s, when several American companies were becoming behemoths. Like the zaibatsu before them, keiretsu insulated Japan from foreign encroachment, this time in terms of mergers and acquisitions. The group's cross-shareholding, constituent companies' tendency to hold one another's equities, increases capital mobility within the conglomerates and isolates them from outside investors. Even in the 21st century, this basic structure remains, limiting keiretsu vulnerability toward influence by foreign investors, although it continues to open more to foreign investment.

By - Luke Mahoney.