Episode 32 – Dr. Masao Nakamura (UBC)

Originally published on June 6, 2018

[This transcript has been edited for clarity.]

Tristan Grunow: This is the Meiji at 150 Podcast. I’m Tristan Grunow. Today, I’m talking with Dr. Masao Nakamura, Professor Emeritus of Commerce and Business Administration at the University of British Columbia. Dr. Nakamura’s most recently the author of “Japan’s Ultimately Unaccursed Natural Resources-Financed Industrialization,” in the March 2018 volume of Journal of the Japanese and International Economies. Dr. Nakamura, thank you for talking with me today.

Masao Nakamura: You’re welcome.

TG: So, I was hoping maybe we could talk about how business and finance in Japan changes with the Meiji Restoration and throughout the Meiji period and leading up to today.

MN: Yes. Until, I’d say, 1868, [the] main businesses [were] really based on individual merchants. In Tokyo (called Edo at that time), [the] biggest one is [the] Mitsui family. They focused on textile[s], particularly silk products and also some financing in the later periods of [the] Edo era. In Osaka, there’s the Sumitomo family, which was running the copper business for a long, long time, since probably the 1500s. And of course, they were the biggest merchants and also, they operated a large copper mine called Besshi Mine, now a tourist attraction in Shikoku island.

So, towards the beginning of the Meiji period, a newer family business emerged: Mitsubishi and quite a few others. But without any economic development, that’s probably where they ended, but at that time, there was a massive desire on the part of not just the Meiji government, but also a lot of leaders in Japan really wanted to catch up with the West. The difference between Japan at that time and the West was so obvious to them, so they did collectively decide to really develop Japan. And it was at that time that [the] new Meiji government also decided to invest massively in so-called modern technologies and new industries, so they did invite many Westerners, engineers and otherwise to Japan. And also, [the] Meiji government established so-called state-owned enterprises in many fields, in many areas of Japan, actually, traces of which are still very visible at this time in different parts of Japan.

They did invest huge amounts, and the amount was enormous relative to their budget, but they did… But over time, these state-owned enterprises (SOEs) did develop in terms of technology and production and so on. So, they were successful at the outset to bring Western technologies into Japanese industries, and so on, but they had very little in terms of management skills. They didn’t know very basic things. You know, they used single-entry bookkeeping rather than double-entry, which is a modern system, and basically, it was all put in the same pot. In Japanese, it is called donburi kanjō. And they didn’t really see which parts or which enterprise is making money, which is losing money, by how much, none of those things.

So over time, towards the middle of the Meiji period, these state-owned enterprises really began to become a financial burden on the Meiji government in terms of budget. And it became obvious to anyone that this is a problem, and at that time, they decided (the Minister of Finance) to do something about this, and they decided that the only thing they could do to get out of this mess was to sell basically all of these state-owned enterprises, which they began. And that was the beginning of a new period as far as economic development is concerned, so they did try… Initially, they didn’t know what these enterprises [were] worth. They just overcharged for the initial prices, and nobody wanted to buy them.

But later, they did work out what might make them attractive, so they did revise the prices, and they also did look at potential buyers who might be more interested because of the future prospects and so on. And it was at this time that many of these merchants – traditional merchants like Mitsui particularly – and then already emerged family groups like Mitsubishi became interested in buying, somewhat, many of these enterprises. So, that’s when these traditional merchant families began getting involved in more modern industries or if they were already involved, they began getting hold of new technologies, which were imported from the West. And in fact, Western technologies imported by the Meiji government became, really, the immediate core of these operations that came with these enterprises, which are bought by Mitsui family and so on.

And I thought it was interesting how that initial start with a failed government effort to develop Japan, and these enterprises were taken over by traditional families, and they became interested because they saw massive profit prospects… So what they did – Mitsui and Mitsubishi and so on – was to really take this opportunity as an advantage, and they massively invested in areas of different industries, which they thought would help develop their own, first of all, company groups, and they probably did have some notions that this would be important for the national goal of economic development. So, that’s the beginning of these merchants turning into more industry-based company groups.

Initially, they had the finance coming from traditional sources of money. Like Mitsui, they had significant amounts of their own money, but also, since they purchased enterprises in coal mining, that became a very big cash cow for the Mitsui group to begin with. And similarly, for example, [the] Mitsubishi family, Iwasaki family bought many promising mines, many of which actually, were operating until fairly recently, and they’ll, again, be earning significant amounts of money.

Now, they didn’t just invest those profits from mining operations into mining again. They really moved the money from mining to more promising future industries, which started with, typically, areas surrounding coal mines, so they needed electrical equipment, they needed chemicals, which can take advantage of coal output and so on. So, they started from that area, but then they eventually expanded those into newer industries, and they did it very fast. This was very important that within each of these family merchant operations, there was only one decision-maker, and that is the family, and they made quick decisions to invest and so on. And that part of the economic development process is something very important.

Now, in economics, it’s called a big push-based development. So what is generally thought necessary – we think now – for economic development is really a massive and rapid investment in all relevant areas, so that there’s no gap in terms of timing or areas that were needed. Originally, this big push theory was proposed much later by an economist, and they thought that such massive, coordinated investments could only be done by [the] government, the public sector. And as it turned out historically, all of such big push attempts by the government failed except Japan (the Meiji period). So, this was one of the examples that [is] often presented as a counterexample, but an interesting thing here is that actually, the process was really very much facilitated by the efforts at the individual family business groups.

So it was this time that [the] Mitsui family in the late 1800s, early 1900s decide to study Western organizations. They did send a delegation to Britain and Europe, and they did find this structure called pyramidal business groups. It works very well, and it actually suits their existing house rules or house structure of a business. Now, pyramidal business groups were already very commonly used in [the] U.K. or Europe or United States, and they all became huge businesses.

It was at this time that business pyramids were used to re-organize Mitsui family companies, or some others: Mitsubishi and so on. And it’s at this time that they took advantage of newly emerged Meiji government driven legal institutions. To make organizations like business pyramids, you need very solid legal foundations. So towards the end of the Meiji period, the Constitution wasn’t there yet, but they did introduce first, a commercial code, a civil code and so on, and later, the Meiji Constitution. So, those legal institutions were beginning to be put in place, and that made it comfortable for Mitsui and other business families to rely on so-called limited liability, so they won’t be liable for all the future lawsuits and so on.

And so, what they ended up having is really re-organiz[ing] their business activities and business operations in this umbrella called business pyramid, and in that, generally, the top is always the family who controls 100% of the companies below it. But the way these are structured, the family owner sets up a number of very important first year subsidiaries, in which in principle, all they have to own is 51%, and the other 49% they could sell to public investors. And for second-tier companies, they create their own subsidiaries, and each of these subsidiaries will be owned 51% by the Mitsui Company, and the other 49%, for example, [was] to be sold to public investors. And so, this is the way they are structured, and this is really the definition of “business pyramid.” So for example, [the] Mitsui family had a Mitsui partnership, and then under that partnership, they had these companies.

The important thing here is that to make this successful and operational as an organization, they needed a very active stock market because they are going to rely on public investors who will participate in these as minority shareholders. So when they buy based on say IPO shares of a particular Mitsui company, they know that they will never have the power to control that company because it is controlled by the Mitsui family. They’re buying into each of these as public investors, knowing they will be minority shareholders with a limited amount of rights, but generally, they do want to do that because they see more prospects for future profits. They could, of course, create their own company or they could buy into independent companies whatever, but you know, probably they thought that buying into [the] Mitsui family company’s subsidiaries might give them more profit even though they will continue to be minority shareholders. So, they did buy into these Mitsui subsidiaries within the Mitsui pyramid, and that brought in a massive amount of capital. This is from the public purse, and it is very helpful for Mitsui to develop their own new business groups and particularly as a whole, to make very coordinated investments across these subsidiaries in different industries.

So, that’s really the beginning of Japan’s so-called the zaibatsu, the business pyramid. They did contribute significantly to Japan’s economic development, so once these are put in place – and there are quite a few of them, but large ones like Mitsui, Mitsubishi, Sumitomo and later, Nissan groups and others really did help Japan’s economic development. And so by 1910 or somewhere around there, Japan’s economy took off according to [inaudible] and so on. So, it became more comparable in terms of industrial structures and so on. If you look at other countries (U.K. or Germany and so on), it looks very similar, so they reached that kind of level.

So in terms of the funding for these massive investments over time, initially, Japanese family merchants depended on resource-based operations, most notably coal, but in [the] case of [the] Sumitomo family, it was copper mines particularly, and so on. But then, once they got into the basic modern industries, they did require more funds, and for that, they did use this characteristic of business pyramid, which they successfully created.

One thing that might be interesting as an anecdote is [the] Sumitomo family, and [the] Sumitomo family never bought any Meiji government state-owned enterprises when all of them were privatized. The reason for that is that Sumitomo really decided they couldn’t trust the government, and the reason for that is that initially, while they were already operating [a] big copper business (mining itself and also selling all over Japan), once the Meiji government was put into place, they decided that they would have to confiscate the Sumitomo copper mines, particularly Besshi Mine, which is by far the largest operation in copper. And so, the Meiji government did confiscate the operation, but immediately they found that they couldn’t run the business. So, they came back to the Sumitomo manager (Hirose and so on) asking them to run it again as they did, which they accepted, and they took over Besshi Mine and operated it just as before. But then after that, they didn’t trust the Meiji government, so they didn’t buy any of the privatized government enterprises, but they did invest in these modern technologies, and they did create their own business pyramid, which became very huge as we know. So, that put the Japanese economy pretty much at the same level as many of the Western countries.

In terms of Japanese business practices, these group-based notions are still strong, and the groups can be created in a variety of ways. For example, if companies heavily rely on banks, banks tend to have their own client company groupings. Now of course, there are many large and small keiretsu groups of some sort, where they tend to prefer doing business within themselves. So I think that’s one of the major practices and more in terms of management practices might be interesting to look at.

After [the] 1990s, when Japanese manufacturing companies lost global competitiveness very significantly, they thought that this group-based buyer system might not be working well, so maybe, they want to buy parts from the lowest cost supplier globally.

It was proposed, and for example, Nissan – it wasn’t merged, but it was taken over by Renault –, so Nissan’s presence then clearly proposed and implemented that system to rely more on non-keiretsu suppliers. So, my understanding is that sometime later, they did re-organize formal case suppliers, but at the same time, Japanese companies, which were heavily relying on keiretsu suppliers were complaining about that system themselves. You know, so when the global prices are much cheaper than keiretsu supplier prices, they still have to use keiretsu suppliers, and that’s a burden. But could they have actually given up that practice? Not necessarily, they still have keiretsu group companies. So, that’s one issue. Now, they recognize those problems more so than before.

And another major issue is labour management, and that is, actually, a major issue even now because of the long-term arrangements between suppliers and assemblers and so on these companies. Yes, they tend to like longer association with workers, and workers like it, and managers tend to like it. There are a number of polls of these executives or workers, and they tend to like long-term relationships. So, one of the issues I think many companies face now is that if that’s the case, can they actually implement [a] pay system where employment is made secure while wages do not need to go up or stay on a very fixed scale and so on. But I think that’s still a big issue. Like long-term employment tends to allow company management to force workers to work a little longer, over time. They tend to have more power over workers. That’s still a big issue. Prime Minister Abe’s still struggling to do something about this overworking, so-called overworking, too much overtime basically forced on workers. Now, workers may want some of that, but probably not necessarily such large amounts of overtime, which will take away their own time.

In terms of economic prospects, it is actually not very easy for Japan because of the general population decline, which is long (30 years ago actually). Very little is done even since then. I think I remember many economies thinking that with a smaller number of workers, all they need is just increased productivity of each person or whatever, so that should be possible: more women – qualified women – working or allowed to work, older people who can work/allowed to work. But it is very difficult to implement those thoughts, and also Japanese company’s productivity is not very high, and it’s not increasing compared to U.S. or Canada or European countries. Japanese per capita productivity regardless of how we measure it is still considerably low, so it’s natural to look at that issue. But so far, that hasn’t improved. I think now, that’s one of the points that even [the] Prime Minister is talk about, but it’s, again, not an easy task. (Laughter)

TG: The Meiji at 150 Podcast is hosted by Tristan Grunow at the University of British Columbia in Vancouver, Canada. This podcast would not be possible without the cooperation of the UBC Centre for Japanese Research and the technical assistance of the UBC Faculty of Arts ISIT. Find out more about the Meiji at 150 Project, including the Meiji at 150 Lecture Series, Digital Teaching Resource and Workshop Series by visiting our website: meijiat150.arts.ubc.ca. Thank you for listening.


*Citation for this episode:

Masao Nakamura, interview with Tristan Grunow, The Meiji at 150 Podcast, podcast audio, June 6, 2018. https://meijiat150.podbean.com/e/episode-32-dr-masao-nakamura-ubc/.

The Meiji at 150 Podcast is hosted, produced, and edited by Tristan Grunow, with editorial assistance from Joshua Linkous. Transcripts by Kelly Chan.