What is 'Keiretsu'

Keiretsu is Japanese term describing the current structure of major companies in Japan, which often results in a grouping of enterprises that take equity stakes in one another and sometimes collaborate and share projects.

Powerful families once ran many of Japan’s major industries. When the U.S. occupied Japan and rewrote the Japanese constitution after World War II, the U.S. government  busted up structures that put a few families in control, seeing them as both monopolistic and undemocratic. Keiretsus formed shortly thereafter, which involved a loose conglomeration of Japanese firms that collaborate and sometimes share the same name.

In Japan, keiretsus still represent major parts of the economy. For example, each of Japan's six car companies belongs to one of the big six keiretsus, as do each one of Japan's major electronics companies.

BREAKING DOWN 'Keiretsu'

Keiretsus are distributors of goods around the world. Perhaps the largest and best-known is Mitsubishi, which once manufactured the A6M Zero fighter planes used in World War II. The Bank of Tokyo-Mitsubishi sits at the top of this current keiretsu. Mitsubishi Motors and Mitsubishi Trust and Banking also are part of the core group, followed by Meiji Mutual Life Insurance Company, a provider of insurance to all members of the keiretsu. Mitsubishi Shoji is the trading company for the Mitsubishi keiretsu.

While companies within the keiretsu operate in different industries, they support one another and operate as business partners in some areas.

For example, banks sometimes own a small percentage of their keiretsu members' stock and members own a portion of the bank's stock. This forms an interlocking relationship, especially if the member company borrows from the horizontal member bank. These interlocking relationships allow the bank to monitor borrowings, strengthen relationships, monitor customers and help with problems such as supplier networks.

This arrangement also limits competition within the keiretsu and prevents company takeovers by outsiders.

The Pros and Cons of Keiretsu

Keiretsus arguably result in natural synergies, lower costs and the sharing of information among customers, suppliers and employees. This typically leads to quicker investment decisions, for example.

However, critics believe that, partly because of their size, keiretsus can't adjust to market changes quickly enough for many of these investments to earn sufficient profits.

Also, some say the limited competition within the keiretsu leads to inefficient practices.

Moreover,  because executives from member companies with a bank at the center of a kieretsu have easy access capital, they might take on too much debt and utilize risky strategies that a company that depends on truly outside capital wouldn’t attempt.

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