Characteristics of Japanese Zaibatsu

The first case study is of Hikojiro NakamigawaFootnote 1 who made his mark as a salaried manager. A salaried manager is a person who has been promoted to a top management post through specialized knowledge acquired at work or at higher academic institutions. They are a different breed of businessperson from owner-managers who arrived at the top through ownership of a company’s assets.

Notably, prior to World War II, zaibatsu-affiliated firms in Japan had far more salaried managers than did non-zaibatsu-affiliated firms. Hidemasa Morikawa, who compiled a detailed list of “Salaried managers in 28 of the 75 largest companies” as of 1905, concluded that “salaried managers were more prevalent in large zaibatsu-affiliated companies.”Footnote 2

Considering that zaibatsu are family businesses, it may be surprising that salaried managers have made significant inroads in such companies, but the role of such managers is an important finding of Japanese business history researchers.

Japanese business historians have been particularly successful in their analysis of the zaibatsu. Historian Hiroaki Yamazaki defines zaibatsu as a diversified business form headed by a family and possessing dominant companies in multiple sectors of a core industry.Footnote 3 Although zaibatsu are also found in other countries, Japanese researchers have identified some unique features of those in Japan:Footnote 4

  1. 1.

    Zaibatsu were created through reforms that transformed them into modern business entities. If they had remained political merchants closely aligned with the powers of the time, Mitsui (effectively commencing operations in 1673) and Mitsubishi (effectively commencing operations in 1873) would been unable to sustain long-term growth. The crisis that engulfed the Mitsubishi shipping company, which lost government support due to the political upheaval of 1881, and the financial difficulties of the Mitsui Bank in the early 1890s, caused by increasing in bad loans to politicians and others, clearly demonstrated the limits of political collusion. Mitsubishi overcame this crisis through a diversification strategy (withdrawal from the shipping business and entry into shipbuilding, banking, mining, warehousing, and real estate businesses) under Yanosuke Iwasaki, the second head of Mitsubishi. Similarly, Mitsui Bank emerged from crisis through a series of reforms (such as liquidation of non-performing loans, fostering of diverse industries through investments and loans, and hiring many salaried managers) that were promoted by Hikojiro Nakamigawa, who was appointed as the bank’s director in 1891. Through these reforms, Mitsui and Mitsubishi transformed themselves from old-fashioned political merchants to modern business entities, setting themselves up for long-term growth.

  2. 2.

    Zaibatsu showed “a strong inclination to industrialization,” Footnote 5 and “played a leadership role (i.e., risk takers’ role) in many industries, except in a few cases such as cotton spinning, electric power generation, and their related industries.”Footnote 6 Hikojiro Nakamigawa, who rose to the top at the Mitsui Zaibatsu, pursued the industrialization path. When presented with greater business opportunities in the period before and after World War I, Mitsui Zaibatsu became a Konzern in German by establishing holding companies, converting directly-owned companies into joint stock companies, and forming a network of subsidiaries.Footnote 7

    Differing patterns of development can be seen in the zaibatsu shift to industrial Konzern-style entities: (a) Yasuda and Nomura, the “financial zaibatsu,” were reluctant to diversify their business; (b) By 1908, Mitsui, Mitsubishi, and Sumitomo, which had already diversified to become “general zaibatsu,” entered the heavy and chemical industries, the few major industries still untouched by zaibatsu; (c) The so-called “mining zaibatsu” of Furukawa and Kuhara, the “manufacturing zaibatsu” of Asano, Kawasaki-Matsukata, and the “logistics zaibatsu” of Okura and Suzuki, that had thus far focused on specific industries, actively promoted diversification and managed to form a broad conglomerate.Footnote 8 Of these patterns, most of the diversification drive mentioned in (c) failed during the economic recession after the 1920 depression. Still, it is clear that the Japanese zaibatsu that had become concerns possessed a “strong inclination for industrialization.”

  3. 3.

    In Japan, zaibatsu-affiliated companies had far more salaried managers than did non-zaibatsu-affiliated companies. At Mitsui, Hikojiro Nakamigawa was one of these managers. A graduate of Keio Gijuku (predecessor of Keio University), he brought in many others from Keio to join the Mitsui family businesses. These Keio graduates who joined Mitsui became some of the leading salaried managers in Japan prior to World War II. The same was true of Mitsubishi, but notable at Mitsubishi was the fact that its owner-managers, Yataro and Yanosuke Iwasaki, actively hired salaried managers.

The reason for the relative prominence of salaried managers in zaibatsu-affiliated firms was that “in Japanese zaibatsu, restraints on [family] ownership were doubly effective—first in the relationship between the owner family and [zaibatsu’s] central company, and second in the relationship between the central company and its direct affiliates.” Footnote 9 In the former, the fact that family ownership was under a joint ownership system that served as a restraint. As we saw earlier in Case 2, joint ownership’s nature “did not permit the division of family property, and the freedom to dispose of assets, which was an essential component of private ownership, was nonexistent.”Footnote 10 Thus, the system of joint ownership functioned to limit ownership by the members and relatives of the founding family. In the latter, central company and affiliates, the central company served as a stable shareholder of its affiliates. The ratio of salaried managers on the boards of directors of all major Japanese companies, including those not affiliated with zaibatsu, steadily rose by the 1930s.

Through a series of business history studies, it became clear that Japanese zaibatsu had the following characteristics: (a) They shifted away from political power, then modernized and streamlined their management; (b) They became leaders in many industries with a strong drive towards industrialization; and (c) They actively recruited and appointed salaried managers. The third point was the most noteworthy of these, showing that while the zaibatsu bore the characteristics of a family business, they also eagerly appointed salaried managers. The salaried managers who were given an active role within zaibatsu played a central role in business modernization and industrialization. These findings contain useful implications for late developer nations in designing their own industrialization, and should be appreciated as an important international contribution by Japan’s business history researchers.

The three characteristics mentioned above are highly relevant to the reforms at Mitsui carried out by Hikojiro Nakamigawa. Nakamigawa can be seen as a personification of the move from political power to industrialization and use of salaried managers. We will briefly review Nakamigawa’s biography leading up to his joining Mitsui and then analyze his record in the order of (a), (c), and (b).

Brief Biography of Hikojiro Nakamigawa

Hikojiro Nakamigawa was born in 1854 (Ansei 1) in what has become today’s Nakatsu City, Oita Prefecture. Hikojiro’s mother, En, was the daughter of Hyakusuke Fukuzawa, an officer of the Nakatsu Domain, and also the sister of Keio University founder Yukichi Fukuzawa. In short, Hikojiro Nakamigawa was a nephew of Yukichi Fukuzawa.

Admiring Fukuzawa, Nakamigawa went to Tokyo and studied at Keio Gijuku in Tokyo. He also studied in Britain from 1874 (Meiji 7) to 1877. Following his return, Nakamigawa worked for the Ministry of Industry and the Ministry of Foreign Affairs of the Meiji government under Prime Minister Kaoru Inoue. Afterward, Nakamigawa served as president of Jiji Shimpo and of Sanyo Railway (SR). Jiji Shimpo, a daily newspaper founded by Yukichi Fukuzawa, was one of Japan’s “Top 5 Newspapers” before World War II, but stopped publication in 1936 (Showa 11). SR, the railroad company that built the Sanyo Main Line among others, is still operated by West Japan Railway Company (JR West) today. Prior to the nationalization of the railroads in 1906 (Meiji 39), the rail lines were privately owned and privately operated.

Nakamigawa stepped down as president of SR in 1891 and became a director of Mitsui Bank on the recommendation of Kaoru Inoue. Under the leadership of Rizaemon Minomura, Mitsui survived the turmoil at the end of the Tokugawa Shogunate and the early days of the Meiji Restoration, but after Minomura’s death in 1877, lack of leadership began to strain the company. The accumulation of bad debts resulting from Minomura’s pro-government policies pushed Mitsui Bank into a crisis, symbolized by a bank run at the Kyoto branch in 1891. To overcome the crisis, Mitsui Bank chose to hire a leader from the outside.

Describing Nakamigawa’s entry into Mitsui, historian Makoto Kasuya highlights the important role of Takashi Masuda, the founder of Mitsui & Co. The decision to hire Nakamigawa reflected the intention of the Mitsui family’s wish to display leadership to the employees. Footnote 11 As Kasuya notes, “When the family assumed leadership over employees, it needed a competent salaried manager who could be entrusted by the family to competently carry out management duties. This is where the family and Inoue’s expectations for Nakamigawa aligned.” Footnote 12

In 1892, a year after joining Mitsui Bank, Nakamigawa became its deputy general manager and undertook a series of managerial reforms, including collecting bad debts, appointing salaried managers, and promoting industrialization. However, Nakamigawa gradually became isolated within Mitsui as the industrialization division continued to generated losses due to the recession that followed the Sino-Japanese War (1894–1895), among other causes. Nakamigawa became ill and died in 1901, before reaching the age of 50.

Recovery of Non-performing Loans

Beyond Nakamigawa’s management modernization and streamlining (point 1), a noteworthy move was clearing bad debts accrued by Mitsui Bank that stemmed from its pro-government policy. One well-known example was pursuing the debt owed by the Higashi Honganji temple.

According to Makoto Kasuya’s work titled “Gosho no Meiji (Meiji of wealthy merchants),” as of June 1891, Mitsui Bank’s outstanding loans to the Higashi Hongwanji temple totaled 990,300 yen, second only to the largest borrower Miike Coal Mine (outstanding loans: 1,076,749 yen). Loans to Higashi Honganji temple were originally initiated through the mediation of Masayoshi Matsukata (see ibid., pp. 52–53).

Mitsui Bank managed to collect the non-performing loan after Nakamigawa joined the bank. According to Kasuya in “Gosho no Meiji” that, “Although there is no historical record of the repayment of the second largest loan to Higashi Honganji, it is safe to assume that the full amount was collected since the complete repayment was expected as of April 1892 and there was no evidence of write-offs or collateral appropriation. Because ‘real [market] value’ as of June 1891 was only about half, it means that thanks to Nakamigawa’s efforts, net assets increased and liquidity improved.”Footnote 13

But Kasuya also states in “Gosho no Meiji” that “Nakamigawa’s clean-up of non-performing loans, like those of Higashi Honganji, cannot be entirely attributed to the series of negotiations that took place after he joined the bank. Various forms of debt clearance efforts were made before Nakamigawa’s arrival, such as collateral appropriations, the selling of the 33rd National Bank even before any substantial surge of ‘real [market] value’, and the complete write-off of ‘loans in arrears.’”Footnote 14 Thus, Kasuya cautions against overestimating the loan recovery effort by Nakamigawa.

Appointment of Salaried Managers

Nakamigawa aggressively hired and appointed salaried managers as described above. Hidemasa Morikawa points out that Mitsui & Co., controlled by Mitsui family members at the time, actively recruited university graduates even before Nakamigawa’s arrival. Footnote 15 However, he also points out:

Mitsui Bank, which was the only business directly run by the Mitsui, was slow to hire university graduates. Hikojiro Nakamigawa, who became a director of the Bank in Meiji 24 [1891] was the first to hire many Keio Gijuku graduates from a variety of professional fields as he promoted bank reform and industrialization from Meiji 25 onward. Footnote 16

Table 1 lists the Keio Gijuku graduates whom Nakamigawa recruited to join Mitsui Bank.Footnote 17 Seishi Nakamura, who compiled the list, noted of Nakamigawa that “he himself was a pioneering salaried manager of zaibatsu, and the highly educated talents recruited during his leadership later became key personnel not only within Mitsui but also in respective fields of industry.” Nakamura continued: “Nakamigawa’s role in the development of Mitsui was significant, particularly in breaking away from its pro-government inclination and in the modernization of human resources.” Footnote 18 In the Mitsui zaibatsu, where salaried managers were promoted in large numbers, what was the relationship between the Mitsui family and these managers? Hidemasa Morikawa suggests, “While the official view was that the bosses of the Mitsui family … should assume top management posts and lead the Mitsui zaibatsu, no one adhered to it. On the other hand, salaried managers were not entirely entrusted with top-level managerial duties, with family members often intervening in the decision-making process.” Footnote 19

Table 1 Keio Gijuku graduates whom Hikojiro Nakamigawa recruited to join Mitsui Bank
Full size table

Makoto Kasuya emphasizes the influence of the Mitsui family in appointing Nakamigawa as well as the constraints placed by the family on Nakamigawa’s reforms were substantially constrained by the family. Footnote 20 However, given that the Mitsui family had no choice but to rely on Nakamigawa, a salaried manager, to pursue managerial reforms at Mitsui Bank, and that Nakamigawa’s reforms contained innovative elements as highlighted above, I believe his reforms were of historical importance.

The appointment of salaried managers similar to those discussed here was also evident at Mitsubishi, where the two owner-managers, Yataro Iwasaki and Yanosuke Iwasaki, supported their recruitment. Mitsubishi managers will be discussed in Case 5.

Industrialization Effort and Its End

Finally, let us look at how Hikojiro Nakamigawa worked to promote industrialization. Historian Shigeaki Yasuoka explains:

Hikojiro had long held the opinion that the company should contribute to the industrialization of Japan. When the four partnership companies were established in June of Meiji 26 (1893),Footnote 21 the Mitsui Motokata-Mitsui Family Association was formed to oversee these companies. The land that had been owned by each company for non-commercial purposes use was placed under the control of a newly established Estate Department, and the factories owned by each company were placed under the control of a newly established Industrial Department, with Mitsui Motokata managing both departments. Hikojiro then devoted his energies to the development of the Industrial Department.Footnote 22

The newly established Industrial Department included the Maebashi Spinning Mill, Oshima Silk Mill, Shinmachi Silk Spinning Mill, Mie Silk Mill, Nagoya Silk Mill, and Tomioka Silk Mill, among others. Footnote 23 According to Yasuoka, “In addition, Kanegafuchi Spinning Co., Ltd. had temporarily fallen into financial difficulties during the depression of Meiji 23 [1890]. Nakamigawa became its president and shored up business, and he also sent Raita Fujiyama to Oji Paper Corporation, which was short of funds for expansion, to effectively control the company. In addition, through the liquidation of non-performing loans, he sought to improve and expand the Shibaura Seisakusho (Shibaura Works), which the company had acquired from Hisashige Tanaka.”Footnote 24

Thus, after joining Mitsui, Nakamigawa aggressively promoted the industrialization of Japan. The effort faced setbacks, however. Owing partly to the recession that followed the Sino-Japanese War, the industrialization drive led to a short-term deterioration in Mitsui’s business performance and increased internal criticism of Nakamigawa’s reforms. This downturn also apparently contributed to Nakamigawa’s death in 1901 at age 47, before he witnessed the fruits of his reforms. Shigeaki Yasuoka calls Nakamigawa “an idealistic entrepreneur who passed away while working toward his goals.” Footnote 25