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No. 14 — April 7, 2000

 

Feature Article

THE KEIRETSU SYSTEM: CRACKING OR CRUMBLING?

Douglas Ostrom

Summary

Whether called keiretsu, zaibatsu or by some other name, corporate groupings have been a distinctive part of Japan's business scene for decades. For almost as long, analysts in the United States and elsewhere have suggested that the days of keiretsu are numbered because the exclusive relationships that such groups imply are thought to be inconsistent with market forces. With Japan's Big Bang financial reform and other liberalization initiatives in progress, this argument has been made more loudly in recent years. For U.S. policymakers as well as for rivals of Japanese firms that consider keiretsu a hindrance to open markets, a keiretsu collapse could not come a day too soon.

Some analysts, particularly those based in Japan, have recognized the economic advantages of keiretsu and, thus, have been reluctant to forecast their demise. Yet they, too, now believe that the role of keiretsu — whether a group clustered around a financial institution or one formed by a manufacturer and its production chain — is diminishing.

Defenders and critics alike have overestimated the economic impact of keiretsu. However, the evidence is somewhat mixed as to whether these corporate groupings are in decline. Linkages among many types of keiretsu firms are weakening for several reasons, but the ties among financial members of keiretsu are becoming stronger. Moreover, even nonfinancial companies are dependent on a smaller number of banks than in the past, which might reflect an increased reliance on keiretsu lenders. Finally, Internet-related businesses talk about forming Net-batsu — a sort of Internet zaibatsu — although the organization of such groups is in its early stages at best.

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Weekly Review

OBUCHI'S STROKE, LIBERAL PARTY'S SPLIT CAUSE SHORT-LIVED POLITICAL UPHEAVAL
--- by Barbara Wanner

Prime Minister Keizo Obuchi's stroke late in the evening of April 1 and subsequent slide into a coma jolted the Japanese political world, which already was trying to sort out the implications of Liberal Party chief Ichiro Ozawa's announcement earlier the same day that the Liberal Party had broken with its ruling coalition partners, the Liberal Democratic Party and the New Komeito. However, the powers-that-be in the LDP moved with uncharacteristic speed to prevent the emergence of a potentially destabilizing political vacuum.

 

TANKAN, OTHER DATA SUGGEST JAPAN NOT YET OUT OF ECONOMIC WOODS
--- by Douglas Ostrom

Whether the Japanese economy is contracting or expanding remains a question without a definitive answer. The results of the Bank of Japan's April 3 tankan (survey of short-term business prospects) did little to clear up the controversy. They indicated that corporations, especially big manufacturers, had grown more confident over the previous three months but still were basically pessimistic. Moreover, the firms included in the tankan's initial survey of capital spending plans for FY 2000 said that they would trim investment even below the depressed levels of the fiscal year that just ended. Participants also revealed that they still had excess employees despite record-high unemployment.

 

TOKYO SHARE PRICES BEGIN FY 2000 ON THE UPSWING
--- by Jon Choy

Ignoring the fact that Japan's gross domestic product contracted during the last half of 1999 (see JEI Report No. 11B, March 17, 2000), investors signaled their confidence in the economy by pushing up equity prices on the Tokyo Stock Exchange during the January-March quarter as measured by the Nikkei average of 225 first-section shares (see Figure). Foreign interest in Japanese stocks remains strong, and domestic investors are beginning to catch buying fever. Market watchers believe that several factors are in place that will put more wind in the sails of Japanese equities and, in so doing, provide a welcome change from most of the 1990s.

NOTES

At the March 29-30 World Bank and European Commission-sponsored Regional Funding Conference for Southeast Europe, participants pledged more than euro 2.4 billion ($2.3 billion at euro 1.05=$1.00) to help the Balkan region recover from the effects of years of turmoil — the result of chronic economic mismanagement and episodic military conflict. Donors convened in Brussels for the first meeting to be held this year in support of the Stability Pact, an initiative launched in June 1999 to promote a comprehensive approach to aid programs for Southeast Europe: Albania, Bosnia, Bulgaria, Croatia, Herzegovina, Macedonia and Romania. Participating in the arrangement are 47 countries, including European Union members, the United States, Canada, Great Britain, Japan, Russia and the countries of the region, plus 36 international organizations.

Tokyo and Washington missed their March 31 target date for completing the third and final report on regulatory reform under the White House's latest Japan market-opening framework. Insiders report that during high-level talks in Tokyo March 21 to March 23, the two sides made progress — often significant, according to these sources — in almost all of the six areas covered by the U.S.-Japan Enhanced Initiative on Deregulation and Competition Policy: housing, medical devices and pharmaceuticals, financial services, energy and the basket category of structural barriers. The spoiler was telecommunications, particularly the fees that the two regional operating units of Nippon Telegraph and Telephone Corp. charge other common carriers to connect with their local-access networks.

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