Social Science Japan Journal Vol. 4, No.

2, pp 243–268 2001

The Role of Holding Companies in Pre-war

Japanese Economic Development: Rethinking
Zaibatsu in Perspectives of Corporate Governance*
OKAZAKI Tetsuji

This paper examines the role of the zaibatsu holding company in corporate governance. Early in the
20th century, Japan’s zaibatsu conglomerates introduced organizational innovation to deal with the problems
attendant on growth and diversification. By the early 1920s, each zaibatsu had established a holding company,
while it separated its various businesses into joint-stock companies.The holding company of the zaibatsu
monitored and audited affiliated companies, and controlled key business decisions, besides frequently
dispatching directors to the affiliated companies.The efficacy of holding-company governance is tested
quantitatively, comparing ROE between zaibatsu affiliated firms and non-zaibatsu firms, using panel data for
135 firms from 1922 to 1936. Controlling for the effects of company scale, industry-specific shocks and
macro-shocks, it is found that zaibatsu-affiliated firms clearly outperformed the other companies.This result
supports the hypothesis that the zaibatsu holding company successfully played the role of monitoring the
affiliated companies. Zaibatsu also disciplined non-affiliated companies in the capital market, frequently
executing takeovers, which contributed to restructuring the targeted companies and improving their
performance. At a time when holding companies have just been legalized once more in Japan, the history
of these pre-war models represents an instructive precedent.

1. Introduction
With the revision of the Anti-monopoly Law in 1997, the holding company, which had been banned
since 1947, regained its legal status in Japan. In debate on the revision, the pre-war zaibatsu were
frequently mentioned. Those who opposed the revision stressed the danger of a zaibatsu revival, while
those who were for it, denied the possibility of such a revival (Subcommittee on Basic Problems
1993).
It is remarkable that both camps took it for granted that the zaibatsu were monopolistic, implying
that both camps took the ‘monopoly branch’ in Oliver Williamson’s cognitive map of contract
(Williamson 1985: 24). In a sense, though, it is natural, because the post-war dissolution of the
zaibatsu and legislation of the anti-monopoly law in 1947, which aimed at maintaining the results
of the dissolution, were based on this standpoint. However, it is not self-evident that the other

OKAZAKI Tetsuji is a professor of economics at the University of Tokyo and a faculty fellow of the Research Institute of
Economy, Trade and Industry. His research interests cover the comparative institutional analysis of economic history,
including the issues of corporate governance, financial systems and industrial policy. His publications include The Japanese
Economic System and Its Historical Origins (co-edited with Masahiro Okuno-Fujiwara; New York: Oxford University Press,
1999); and ‘The Foreign Exchange Allocation Policy in Post-war Japan: Its Institutional Framework and Function’ (co-
authored with Takafumi Korenaga) in ed. Takatoshi Ito and Anne O. Krueger, Changes in Exchange Rates in Rapidly
Developing Countries (Chicago: University of Chicago Press, 1999). He may be reached by e-mail at okazaki@e.u-tokyo.ac.jp
*This paper is an English summary version of Okazaki (1999a) except for revisions made in response to comments by the
anonymous referees. See note 12.

© Institute of Social Science, University of Tokyo 2001

244 OKAZAKI Tetsuji

approach outlined by Williamson, namely the ‘efficiency branch’, is not useful for understanding
zaibatsu.
This paper re-examines the role of the zaibatsu from the ‘efficiency’ perspective, focusing on the
corporate governance function of the zaibatsu holding companies.1 In recent years, corporate
governance has come to be a major issue of economics and policy-making. It has been widely
recognized by economists as the key to corporate efficiency (Shleifer and Vishny 1997; Keasey,
Thompson and Wright 1997). Japan’s financial crises and economic stagnation in the 1990s are
often blamed on poor corporate governance (Horiuchi and Hanazaki 1998). Hence, an
investigation of how pre-war Japanese firms were governed may offer clues to understanding the
predicament of Japanese firms today.
The M-firm hypothesis proposed by Williamson (1975) provides my basic framework of analysis.
Williamson stressed the role of the multi-divisional firm (M-firm) in corporate governance. Contrary
to the naïve assumption of neoclassical economics, a serious information asymmetry usually exists
between investors in the capital market and corporate managers, which makes it difficult for the
former to discipline the latter effectively. Arguably, the M-firm resolves the information asymmetry.
First, the well-staffed general headquarters of the M-firm can intensively monitor the divisions under
it. Secondly, the M-firm is well positioned to evaluate the potential market value of non-affiliated
companies. Through stock-trading and corporate takeovers, the M-firm can effectively discipline
non-affiliated companies as well.
I will argue that the zaibatsu holding companies played the role that Williamson attributed to the
M-firm. In this sense, the zaibatsu formed the organizational foundation of the corporate system in
pre-war Japan.2
The zaibatsu have been a favourite subject for business historians (Morikawa 1978, 1992;
Fruin 1992; Kikkawa 1996). In the business history literature, zaibatsu have been regarded as the
corporate groups that lead Japanese industrialization. However, this literature has neglected the
corporate governance issue. It is true that they discuss the issue of control by the holding company,
but their stress is on the wide discretionary powers afforded to the salaried managers of affiliated
companies. As recent studies on corporate governance have made clear, this was the very reason why
those salaried managers needed to be closely monitored and disciplined by investors in order for the
companies to be efficient.3
The paper is organized as follows. Section 2 addresses the position of the zaibatsu in the pre-war
Japanese economy, as well as giving a brief history of the zaibatsu. Section 3 focuses on zaibatsu
organizational innovations, particularly the establishment of the holding company. Section 4
executes quantitative analyses of the zaibatsu’s governance function vis-à-vis affiliated companies.
Section 5 examines the governance function of the zaibatsu in the capital market and the
conclusions are in Section 6.

1. I have previously discussed the governance function of the internal capital market of the zaibatsu in Okazaki (1993) and
Okazaki (1999b). This paper is an extension of these articles.
2. Williamson (1975) defined the holding company (H-form) as ‘the divisionalized enterprise for which the requisite
control apparatus has not been provided’ (p. 152). However, as Williamson noted himself, this terminology is somewhat
idiosyncratic (p. 143).
3. Kikkawa (1996) stressed that zaibatsu confined the power of ownership at two levels: the power of the family over the
holding company was limited, and so was the power of the holding company over the affiliated companies (pp. 81–93).
This view has value as a criticism of the traditional view focused on ‘control’ by zaibatsu, and I myself have stressed
the long-term time horizon of governance of affiliated companies by the zaibatsu holding company (Okazaki 1993).
However, Kikkawa misses the corporate governance issue.
 The Role of Holding Companies in Pre-war Japanese Economic Development 245

2. Accumulation and Diversification of Assets

Table 1 shows the shares of the zaibatsu in terms of paid-in capital in 1937, the last year of the pre-
war period.4 The Holding Companies Liquidation Committee (HCLC), which was established to
oversee the zaibatsu dissolution in 1946, identified ten major zaibatsu, namely Mitsui, Mitsubishi,
Sumitomo, Yasuda, Furukawa, Nissan, Okura, Nomura, Asano and Nakajima. Nine of them (excluding
Nakajima5) accounted for 15% of total paid-in capital in Japan in 1937.
When the USA occupied Japan in 1945, the US government described the zaibatsu as ‘the large
industrial and financial combinations which have dominated a large part of Japanese commerce and
industry’ (Ministry of Finance 1981: 22). Table 1 indicates that the US government overrated the
position of the zaibatsu, although their share was far from negligible. Observed by industry, zaibatsu
share was relatively high in finance, mining, manufacturing, shipping and real estate. On the other
hand, it was lower in utilities, land transportation and commerce.
In order to clarify the position of the zaibatsu in relation to large companies, I have compiled a
company database. The data sources are: (1) Toyo Keizai Shinposha ed. Kabushiki Gaisha Nenkan
(Joint-stock Company Yearbook), 1937 edition; (2) Osakaya Shoten ed. Kabushiki Nenkan (Stock
Yearbook), 1938 edition; and (3) HCLC (1951). Sources (1) and (2) cover major companies whose
stocks were openly traded in the capital market. On the other hand, they miss those companies
whose stocks were held by a small number of shareholders, as was frequently the case with zaibatsu-
affiliated companies. Source (3) covers these closed companies.
I identified 355 private companies with paid-in capital exceeding five million yen in 1937. Table 2
shows how many zaibatsu-affiliated companies are in the top 10, 30, 50, 100, 200 and 300 companies,
in terms of paid-in capital. There are 3, 10, 18, 38, 65 and 94 zaibatsu-affiliated companies
respectively, which means that approximately one-fourth to one-third of the large companies were
affiliated to zaibatsu. The share is somewhat higher than that in Table 1, still broadly confirming the
picture of zaibatsu holding a substantial but not dominant position in the pre-war Japanese economy.
The zaibatsu achieved this position through development going back to the nineteenth century.
Figure 1 indicates the growth of the zaibatsu in terms of the assets of the holding companies. Data
for Mitsui, Mitsubishi, Sumitomo, Yasuda and Nissan are available. The former four zaibatsu ex-
panded rapidly in the late 1910s. Nissan, one of the ‘new zaibatsu’, was formed in 1928, taking over
the companies of the Kuhara zaibatsu, which was bankrupted in the 1920s. The rapid expansion
in the late 1910s was mainly due to the boom caused by World War I, but it was nominal to some
extent. If we measure the scale of each zaibatsu in terms of the ratio of its assets to nominal GNP,
the ratio increased fairly steadily from the 1880s to 1930s (Figure 2).
As zaibatsu grew, their assets were diversified into various businesses, as seen in Table 1. The
chronology of diversification for two of the zaibatsu is summarized in Tables 3 and 4.6 For example,
there are 18 Mitsui affiliates in the above-mentioned database of 355 companies. Table 3 shows (1) the
year when each company was established, and (2) the year when Mitsui entered that company’s
line of business. Where (2) preceded (1) Mitsui had set up a new affiliate to handle a line of business
in which the company was already involved. Where (1) preceded (2), this implies that Mitsui acquired
existing companies. The implications of these dates for corporate governance will be discussed in
Section 5. We can systematically follow the process of diversification at Mitsui and Nissan through
these tables.

4. The Sino-Japanese War broke out in July 1937.

5. Nakajima did not take shape as a corporate group until the 1940s.
6. For corresponding data on other zaibatsu, see Okazaki (1999a).
 246

Table 1. Zaibatsu Shares in Industrial Sectors in Terms of Paid-in Capital (1937)

Total Total of Mitsui Mitsubishi Sumitomo Yasuda Furukawa Nissan Okura Nomura
(million yen) the nine (%) (%) (%) (%) (%) (%) (%) (%)
(%) zaibatsu
OKAZAKI Tetsuji

(%)

Total 17,655 15.0 3.5 3.3 2.2 1.4 0.4 2.2 0.6 0.3
Finance 1,640 25.3 4.3 7.7 3.6 8.6 0.1 0.1 0.0 0.9
Banking 1,419 21.7 4.2 4.4 3.5 8.8 0.1 0.0 0.0 0.7
Trust 74 43.6 10.1 10.1 6.8 10.1 0.0 0.0 0.0 6.4
Insurance 147 50.4 2.0 38.7 2.2 6.0 0.0 0.8 0.3 0.3
Mining 1,453 35.5 11.2 7.4 2.3 0.0 1.0 11.2 1.1 0.0
Manufacturing 6,049 18.2 3.5 3.6 2.8 0.5 0.9 3.5 0.7 0.2
Heavy and chemical 3,613 20.6 3.8 4.3 3.8 0.2 1.4 4.4 0.8 0.0
Metals 912 14.6 1.6 1.4 6.1 0.0 0.1 0.0 0.7 0.0
Machinery 1,311 27.2 3.1 8.1 3.2 0.5 3.3 5.8 1.3 0.0
Chemical 1,389 18.3 5.8 2.6 2.8 0.2 0.5 6.0 0.4 0.0
Light 2,437 14.6 3.2 2.5 1.5 0.9 0.1 2.2 0.6 0.6
Paper 346 5.6 0.0 2.3 0.0 2.6 0.0 0.0 0.7 0.0
Ceramics 298 46.6 8.6 11.1 1.8 0.0 0.0 0.0 0.0 0.0
Textile 1,075 10.3 3.8 0.5 2.8 1.2 0.1 0.0 1.0 1.0
Food 718 12.1 1.6 2.1 0.0 0.0 0.0 7.4 0.3 0.6
Electricity 2,649 3.6 0.4 0.0 0.7 1.9 0.0 0.2 0.0 0.4
Land transportation 1,278 6.4 0.6 0.7 3.5 0.6 0.0 0.0 0.8 0.0
Shipping 476 19.1 0.6 15.6 0.0 0.0 0.0 0.8 0.0 0.0
Real estate and warehousing 635 21.2 2.0 1.9 9.0 3.2 0.0 0.5 1.4 0.0
Commerce 2,920 6.0 4.3 0.8 0.0 0.2 0.0 0.0 0.3 0.3
Others 554 8.4 1.3 0.9 0.2 0.0 0.1 0.3 3.3 1.9

Source: HCLC (1951).

 The Role of Holding Companies in Pre-war Japanese Economic Development 247

Table 2. Major Zaibatsu-owned Companies by Industry (1937)

Industry Total number of Number of zaibatsu

major companies companies among them

Total 10 3
30 10
50 18
100 38
200 65
300 94
Finance
Bank 10 4
Trust 7 4
Insurance 1 1
Mining 10 8
Manufacturing
Metals 10 7
Machinery 10 7
Chemicals 10 5
Paper 5 2
Ceramics 10 4
Textiles 10 2
Foods 10 3
Electricity and gas 10 0
Land transportation 10 1
Shipping 7 3
Real estate/warehousing 10 6
Commerce 10 4
Others 10 5

Source: HCLC (1951); Toyokeizai Shinposha ed. Kabushiki Gaisha Toyo Keizai Shinposha Nenkan, 1937 edition; Osakaya
Shoten ed., Kabushiki Nenkan, 1938 edition.

Among Mitsui’s businesses in 1937, the financial operations, originating in the seventeenth
century, were by far the oldest. Although the first business of Mitsui was a kimono store, this was
separated from Mitsui in 1904 (Yasuoka 1987). When the Meiji government was established in the
1860s, Mitsui, by then a major financier, was entrusted with administration of government funds.
This came to be a major source of profit until the Bank of Japan was established in 1882. In 1876,
Mitsui founded Mitsui Bank to take charge of its financial business (Yasuoka 1982: 87–88).
Two other major businesses of Mitsui, trading and mining, branched out from its financial busi-
ness in the 1870s. In 1874, Mitsui started the trading house that would become Mitsui & Co., and
set up 27 branches all over Japan. The firm hoped that expansion of trade would enlarge its domestic
exchange business (Mitsui Bunko 1980a: 227). Also in the 1870s, Mitsui acquired several metal mines
through foreclosure (Yasuoka 1982: 128). Mitsui’s mining business was extended through acquisition
of the state-owned Miike Coal Mine, and coal from Miike, in turn, became the cornerstone of Mitsui
248 OKAZAKI Tetsuji

450,000

400,000

350,000
Mitsui

300,000

250,000

200,000 Mitsubishi

150,000
Sumitomo
Asano
100,000
Nissan
50,000
Yasuda
0
96

98

00

02

06

08

10

12

16

18

20

22

28

30

32

36
92

04

14

26

34
94

24
18

18

19

19

19

19

19

19

19

19

19

19

19

19

19

19
18

19

19

19

19
18

19
Figure 1. Growth of the assets of zaibatsu holding companies (in thousands of yen).

2.5

Mitsui

1.5
Mitsubishi

1
Sumitomo
Asano
0.5 Nissan

Yasuda

0
20
08
06

18
92

96

98

00

10

12

16

22

26

28

30

32

36
02
94

04

14

24

34
19
19
19

19
18

18

18

19

19

19

19

19

19

19

19

19

19
19
18

19

19

19

19

Figure 2. Growth of the assets of zaibatsu holding companies (percentage GNP).

 The Role of Holding Companies in Pre-war Japanese Economic Development 249

Table 3. Diversification of the Mitsui Zaibatsu

Major Mitsui companies (1) Year of (2) Year Mitsui started

in 1937 establishment the business

Mitsui Bank 1876 1683

Mitsui & Co. 1876 1874
Mitsui Mining 1907 1874
Toshin Warehouse 1909 1892
Shibaura Manufacturing 1904 1893
Toyo Raw Cotton 1920 1894
Onoda Cement 1881 1897
Hokkaido Coal Mine and Shipping 1889 1899
Nihon Steel Works 1907 1907
Dainihon Celluloid 1919 1908
Toyo High Pressure 1933 1912
Miike Nitrogen Industry 1931 1912
Taiheiyo Coal Mine 1920 1915
Mitsui Trust 1924 1924
Kamaishi Mining 1924 1924
Mitsui Life Insurance 1927 1926
Toyo Rayon 1926 1926
Nihon Flour Mill 1896 1928

Source: Wada (1937); Yasuoka (1982); Matsumoto (1978); Mitsui Bunko (1980a, b); History of each company.

Table 4. Diversification of the Nissan Zaibatsu

Major Nissan companies (1) Year (2) Year Nissan entered

in 1937 established the business

Nihon Mining 1929 1929

Hitachi Manufacturing 1920 1929
Hitachi Electric Power 1927 1929
Nissan Rubber 1934 1929
Kita Karafuto Petroleum 1926 1929
Nissan Automobile 1933 1933
Nihon Fishery 1925 1934
Nihon Chemical Industry 1934 1934
Nihon Fat 1921 1934
Osaka Manufacturing 1913 1934
Nihon Victor 1927 1937

Source: Wada (1937); Udagawa (1984).

250 OKAZAKI Tetsuji

& Co.’s overseas business (Mitsui Bunko 1980a: 303). In this sense, the financial, mining and com-
mercial businesses of Mitsui were mutually complementary.7
In the 1880s, Mitsui moved into manufacturing industry, under the leadership of Hikojiro
Nakamigawa, a vice president of Mitsui Bank (Morikawa 1978: 66; Yasuoka 1982: 144). His ‘indus-
trialization policy’ was not very successful in terms of short-run profitability, but resulted in several
important manufacturing companies, such as Shibaura Manufacturing (Shibaura Seisakujo), one of
the predecessors of Toshiba, and Onoda Cement becoming affiliated to Mitsui.
After the death of Nakamigawa in 1901, Mitsui continued to invest in the manufacturing industries,
based on its mining business. In 1907, Hokkaido Coal Mine and Shipping (Hokkaido Tanko Kisen),
an affiliated coal mining company, teamed up with some British companies to establish Nihon Steel
Works (Nihon Seikojo), giving Mitsui an indirect entry into the steel industry (Mitsui Bunko 1980b:
176–179). In 1912, a chemical plant, utilizing coke gas, started up at Miike Mine, and this was the
origin of Miike Nitrogen Industry (Miike Chisso Kogyo) and Toyo High Pressure Industry (Toyo
Ko’atsu Kogyo), established in the 1930s (Yasuoka 1982). In the 1920s, Mitsui entered into the life
insurance and food industries through acquisitions (Mitsui Bunko 1994: 38–39).
As mentioned above, the Nissan zaibatsu was established in 1928, succeeding the Kuhara zaibatsu.
In the 1920s, Kuhara was stricken by unsuccessful commodity speculation. Fusanosuke Kuhara,
owner of the Kuhara zaibatsu, asked Gisuke Ayukawa, his brother in law, to restructure the businesses.
Ayukawa reorganized Kuhara Mining (Kuhara Kogyo) into Nihon Industries (Nihon Sangyo, later
abbreviated to Nissan) as a holding company, with Nihon Mining (Nihon Kogyo) as its mining
affiliate (Udagawa 1984). Nihon Industries held the shares of ex-Kuhara companies, such as Nihon
Mining, Hitachi Manufacturing (Hitachi Seisakujo) and Hitachi Electric Power (Hitachi Denryoku)
(Table 4).
After the reorganization, Nissan rapidly expanded its businesses through an aggressive campaign
of mergers and acquisitions. In 1931, Nissan acquired Datto Automobile Manufacturing (Datto
Jidosha Seizo) as a way into the automobile industry (Nissan Automobile 1965: 27–39). In 1934,
Nissan merged Kyodo Fishery (Kyodo Gyogyo) with Osaka Manufacturing (Osaka Tekkojo, a
shipbuilding company) to form Nihon Fishery (Nihon Gyogyo), which was later separated off as a
subsidiary of Hitachi Manufacturing (Nihon Fishery 1961: 297–298; Wada 1937: 200). In 1937,
Dainihon Coal Mining (Dainihon Tanko) was reorganized under Nissan as Nihon Chemical Industry
(Nihon Kagaku Kogyo) and merged with Dainihon Fertilizer (Dainihon Hiryo) (Nissan Chemical
1969: 98).

3. Organizational Innovation for Governance: Establishment of the

Holding Companies
In general, expansion and diversification of businesses increase monitoring costs to investors. The
development of the zaibatsu caused this problem. They adopted various countermeasures, the key
one being the establishment of holding companies, designed to monitor affiliated companies. From
the 1900s to the 1920s, the zaibatsu reorganized their businesses into joint-stock companies, and
established holding companies that held the shares of those companies.8

7. Zaibatsu played the role of resolving problems arising from complementarity, which was taken over by MITI’s industrial
policy in the post-war period (Okazaki 1997).
8. I describe the process of these organizational reforms in more detail elsewhere (Okazaki 1999a).
 The Role of Holding Companies in Pre-war Japanese Economic Development 251

3.1 Internal Organization of the Holding Companies

Mitsui Gomei, the holding company of the Mitsui zaibatsu, was established in 1909. Its purpose was
prescribed in its Business Rules as monitoring and co-ordination of affiliated companies. For this
purpose, Mitsui Gomei had an Inspection Section (Kensa-ka) and a Finance Department (Zaimu-bu)
(Figure 3). The former checked documents submitted by the auditors of the companies, large portions
of whose stocks were held by Mitsui Gomei. It also inspected the businesses and accounts of those
companies. The latter was in charge of the financial matters of Mitsui Gomei itself and its affiliated
companies (Kasuga 1987: 27–29).
Mitsubishi Goshi was established as the headquarters of the Mitsubishi zaibatsu in 1893, and
proceeded to manage the businesses through a multidivisional organization. From the late 1910s to
the early 1920s, Mitsubishi Goshi separated its divisions into joint-stock companies, and developed
into a holding company. Meanwhile, Mitsubishi Goshi reformed its internal organization to set up
four sections, namely, Monitoring (Kanri), Personnel Affairs (Jinji), Industrial Research (Sangyo)
and General Affairs (Somu) (Figure 4).

President

Board of Directors

Headquarters Department of Department of Councilor Non-regular Taiwan

Business Finance Staff employees Branch

Secretariat Documents Inspection Supplies Real Estate Forestry Research Accounting

Source: Mitsui Bunko 1994: 7.

Figure 3. Organization of Mitsui Gomei.

President

General Director Councilor

Board of Directors

Director

Secretariat General Affairs Industrial Research Personal Affairs Monitoring Real Estate
Source: Mishima ed. 1981: 88.

Figure 4. Organization of Mitsubishi Goshi.

252 OKAZAKI Tetsuji

The Monitoring Section audited the accounts and businesses of Mitsubishi Goshi itself and its
core affiliated companies, and it was also in charge of the budget, the settlement of accounts and
the finances of those companies. In this sense, the Monitoring Section was a counterpart of Mitsui’s
Inspection Section and Finance Department. The Personnel Section likewise covered the core affiliated
companies, as well as Mitsubishi Goshi itself (Mishima 1981: 88–92).
Sumitomo set up Sumitomo Sohonten as its headquarters in 1909, upgrading the function of its
predecessor, Sumitomo Honten. By 1920, Sumitomo had reorganized its businesses of finance,
steelmaking and cable manufacturing into Sumitomo Bank (Sumitomo Ginko), Sumitomo Steel
(Sumitomo Seikojo), and Sumitomo Cable Manufacturing (Sumitomo Densen Seizojo), respectively.
Consequently, Sumitomo Sohonten came to be the holding company, although it still had various
businesses of its own. In 1921, Sumitomo Sohonten was reorganized into Sumitomo Goshi, and
after that, it successively separated off its businesses to become a holding company in the narrow
sense.
In 1928, when most of Sumitomo’s businesses had been reorganized into joint-stock companies,
the ‘Company Rules’ (shasoku) of Sumitomo Goshi were drawn up. The Company Rules specified
four departments, namely, Personnel Affairs (Jinji), Finance (Keiri), General Affairs (Somu) and
Engineering (Kosaku) (Figure 5). The Finance Department checked the budgets and settlements of
the core affiliated companies, and supervised them. It also investigated new business frontiers. The
Accounting Section (Kaikei-ka) in the General Affairs Department monitored the accounts and cash
flows of the core affiliated companies. The Personnel Department, as in the case of Mitsubishi,
administrated the personnel affairs of the core affiliated companies as well as Sumitomo Goshi itself
(Asajima 1983: 69–72).
Yasuda Hozensha was established in 1887 to take charge of the shares of Yasuda Bank. However,
it was a nominal company without organization and full-time staff, and the shares of the affiliated
companies were held by Yasuda Bank (Yui 1986: 83–88). In 1905, three departments with full-time
staff were set up in Yasuda Hozensha. At the same time, a large part of the shares that Yasuda Bank
had held were transferred to Hozensha. Consequently, Yasuda Hozensha came to be the holding
company of the Yasuda zaibatsu (Yui 1986: 255–261, 290–291).

President

General Director

Department of Department of Department of Department of

Personnel Affairs Finance General Affairs Engineering

Personnel Labor Mining Commerce General Accounting Real Construction Engineering Works
Affairs and Industries Affairs Estate

Source: Asajima 1983: 69–72.

Figure 5. Organization of Sumitomo Goshi.

 The Role of Holding Companies in Pre-war Japanese Economic Development 253

In 1922, one year after the assassination of Yasuda Zenjiro, the founder of the Yasuda zaibatsu,
an organizational reform of Hozensha was carried out under the leadership of Yuki Toyotaro, who
was brought in from the Bank of Japan to join Yasuda’s top management. As a result, Hozensha
came to be composed of six departments, namely, Secretariat (Hisho), General Affairs (Shomu), Finance
(Rizai), Banking (Ginko), Company (Kaisha) and Research (Chosa). The Banking Department was
in charge of inspecting the affiliated banks, as well as the financial adjustment of those banks, an
arrangement reflecting the fact that Yasuda had concentrated its assets in the banking sector. Mean-
while, the Company Department was in charge of auditing, financing and inspecting the affiliated
companies (Editorial Committee of the History of Yasuda Hozensha and Its Related Businesses
1974: 532–537).
Nihon Sangyo (Nissan) restructured in 1934, when business diversification had already made
considerable progress. Three departments, namely General Affairs (Gyomu), Monitoring (Kanri)
and Business (Kigyo) were set up (Figure 6). The Department of Monitoring monitored affiliated
companies and was also in charge of the legal aspects of M&A. Ayukawa compared the Department
of Monitoring to the government’s Board of Audit (Kaikei Kensa’in) (Udagawa 1984: 53–54).

3.2 Allocation of Powers and Information System

In the Mitsui zaibatsu, the core affiliated companies required the ex ante approval of Mitsui Gomei
for any matter important enough to be decided by the board of directors. As well as giving Mitsui
Gomei veto power over key decisions, this system also served as an information system enabling
Mitsui Gomei to monitor its core affiliated companies (Kasuga 1987: 27).
Mitsui Gomei also seconded managerial staff to the affiliated companies as directors to monitor
them (Okazaki 1999b). Mitsui’s ‘Business Rules’ prescribed that the seconded directors should
report to the president of Mitsui Gomei when necessary and should rely on his ex ante judgement
in matters of importance (Kasuga 1987: 27).
The Mitsubishi zaibatsu had systematic rules on power allocation between the holding company
and its core affiliated companies, set down in the ‘Rules on the relationship between core affiliated
companies and Mitsubishi Goshi’ (1918). The main points of this document were as follows (Mitsubishi
Economic Research Institute 1958: 65–67).
(a) The Directors and auditors of a core affiliated company should be registered at Mitsubishi
Goshi.
President

Department of Department of Department of Secretariat

General Affairs Monitoring Business

General Stocks Accounting Documents Control Audit Mining Industries Fisheries

Affairs
Source: Udagawa 1984: 53.

Figure 6. Organization of Nihon Sangyo.

254 OKAZAKI Tetsuji

(b) Rules enacted by Mitsubishi Goshi should apply to the core affiliated companies. When a
core affiliated company establishes different or significant rules, approval by the president of
Mitsubishi Goshi is necessary. All rules established by the core affiliated companies should be
reported to Mitsubishi Goshi.
(c) The budget and settlements of each core affiliated company should be approved by the
president of Mitsubishi Goshi.
(d) A core affiliated company should send forecasts of income, expenditure and profit and loss to
Mitsubishi Goshi.
(e) The head of the Audit Section, Department of General Affairs, should audit the accounts of
the core affiliated companies in compliance with orders from the president of Mitsubishi Goshi.9
(f) The staff of a core affiliated company should be screened and employed by Mitsubishi Goshi.
Personnel decisions on staff above the level of councillor (sanji) require the approval of the
president of Mitsubishi Goshi. Decisions relating to other staff should be notified to the
president of Mitsubishi Goshi, by way of the Section of Personnel Affairs, Department of
General Affairs, in advance.10

Two other documents added detail to the rules of the relationship. ‘Internal rules on the boards of
directors of the core affiliated companies’ (1919, revised in 1922) prescribed that matters deter-
mined by the board of directors of any core affiliated company should be approved by the president
of Mitsubishi Goshi before enforcement. In case of emergency, they should be approved ex post
(Mishima 1981: 93). ‘Rules on the raising and application of funds at the core affiliated companies’
(1918) stated that each core affiliated company should concentrate its operational accounts in the
Banking Department of Mitsubishi Goshi,11 enabling the holding company to monitor their operations
(Mitsubishi Keizai Kenkyujo 1958: 63–65; Hagimoto 1995: 82–84).
In the Sumitomo zaibatsu, ‘Sumitomo Family Laws’ and ‘Sumitomo Accounting Rules’ (until 1928)
or ‘Company Rules’ (after 1928), prescribed allocation of powers and information systems. The
Company Rules obliged core companies to report ‘Estimated Accounts’ ex ante, and ‘Actual Accounts’
ex post, to Sumitomo Goshi every year (Asajima 1983: 79–90).
At Yasuda, likewise, core affiliated companies had to consult Yasuda Hozensha ex ante on articles
of incorporation, important rules, non-routine matters of the shareholders meeting and board of
directors, budgeting, settlements, disposition of profit and loss, personnel affairs etc. Core affiliates
had to notify Hozensha on applications to and orders from public agencies, routine matters of the
shareholders meeting and board of directors, personnel affairs and balance sheets. Detailed data on
the current business situation etc. was also required (Hashimoto 1992: 118; Editorial Committee
of the History of Yasuda Hozensha and its Businesses 1974: 538–539).

4. Quantitative Analysis of Profitability

How well did these monitoring mechanisms work? The efficacy was tested quantitatively, through
analysis of profitability. Sample firms were selected as follows.

9. The Audit Section was moved from the General Affairs Department to the Monitoring Section in 1919.
10. The Section of Personnel Affairs was made independent from the Department of General Affairs in 1919 (Mishima 1981:
88).
11. The Banking Department of Mitsubishi Goshi was reorganized into Mitsubishi Bank in 1919.
 The Role of Holding Companies in Pre-war Japanese Economic Development 255

First, from the 1937 issue of the Kabushiki Nenkan published by Osakaya Shoten, and from
HCLC (1951), all companies with paid-in capital exceeding 10 million yen were selected. As in
Section 2, HCLC (1951) was used to include companies with small numbers of shareholders.
Secondly, out of those primary sample firms, those with no more than half a year missing from
their financial data for 1922–1936 were selected. Financial data were drawn from various issues of
Osakaya Shoten ed. Kabushiki Nenkan, and from company reports included in either the Yushodo
microfilm collection of business reports or the original business reports held at the library of the
Faculty of Economics, University of Tokyo. This generated a sample of 135 firms, 30 of them
affiliated to one of the nine major zaibatsu, namely Mitsui, Mitsubishi, Sumitomo, Yasuda, Furukawa,
Nissan, Okura, Nomura and Asano.
Table 5 shows the distribution of the 135 firms by industry. Many firms in capital-intensive
industries such as utilities and land transportation are included. The next biggest sectors are the
financial and textile industries. Comparing the distribution of firms by industry between the zaibatsu
and non-zaibatsu groups, we find that there was a substantial difference (Figure 7). The zaibatsu-
affiliated companies were relatively concentrated in finance, mining, metals, machinery, chemicals,
ceramics, commerce, real estate and warehousing. Non-zaibatsu companies were relatively concen-
trated in paper, textiles, foods, electricity, land transportation and s1hipping.
The return on equity (ROE) of each firm was computed by dividing the net profit each term by
paid-in capital plus retained profit at the end of the term. The total (non-weighted) average of ROE

Table 5. ROE of 135 Major Firms by Industry

Average paid-in Average ROE

capital thousands of yen

Number 1922 1936 1922– 1922– 1927– 1932–

of firms 1936 1926 1931 1936

Total 135 19,674 39,799 8.9 10.9 7.0 8.9

Finance 15 27,347 37,281 5.9 11.2 –1.1 7.7
Mining 5 45,025 55,860 6.3 5.5 5.9 7.7
Metals 4 18,906 21,339 4.9 2.2 –3.1 15.5
Machinery 10 19,525 37,315 6.6 10.4 –0.2 9.6
Chemicals 6 10,008 31,715 9.9 8.1 8.7 13.1
Paper 1 31,500 187,491 13.1 16.4 11.7 11.4
Ceramics 3 8,704 32,933 10.9 14.6 8.1 10.1
Textiles 14 15,420 28,172 11.6 13.5 10.0 11.4
Foods 8 19,067 35,785 12.9 15.7 7.8 15.3
Electricity and gas 33 20,735 60,578 10.7 11.8 11.4 8.9
Land transportation 21 9,824 24,064 8.3 10.3 8.7 6.0
Shipping 5 31,125 34,475 4.0 5.9 3.5 2.7
Commerce 5 32,000 35,350 10.6 14.3 8.4 8.7
Real estate/warehousing 5 11,500 13,000 5.9 9.3 6.2 2.0

Source: Osakaya Shoten ed. Kabushiki Nenkan, various issues; HCLC (1951); business reports of each company.
256 OKAZAKI Tetsuji

Figure 7. Distribution of firms by industry.

in 1922–1936 was 8.9%. Splitting the samples into three sub-periods, 1922–1926, 1927–1931 and
1932–1936, we find ROE declining in the second sub-period, reflecting the Great Depression in
Japan. However, Table 5 also illustrates the varying trends among industrial sectors. First, light
industries, such as paper, ceramics, textiles and foods, consistently did better than average. Secondly,
mining, shipping and real estate/warehousing steadily performed below the average. Thirdly, the
heavy industries such as metals, machinery and chemicals were behind the average initially but
came to outperform it in the 1930s. Fourthly, finance and commerce, which had outperformed the
average, fell behind it in the 1930s.
The first group was composed of mature industries that remained strongly profitable. The second
group consisted of stagnating industries that had developed earlier than the manufacturing industries
in the nineteenth century. The third group consisted of developing industries, which had started to
grow during World War I and became industrial leaders in the 1930s. Meanwhile, the fourth group
comprised declining industries.
It is remarkable that the major investment fields of the zaibatsu, as shown in Figure 7, were the
stagnating and declining industries (the second and fourth groups), and the developing industries
(the third group). Keeping in mind the process of diversification described in Section 2, we can say
that the zaibatsu invested capital accumulated by the old industries since the nineteenth century into
the newly developing heavy and chemical industries.
The average ROE of the zaibatsu firms was lower than the overall average, except for the sub-
period of 1932–1936 (Tables 5–7). However, this is mainly because of the difference in firm distribu-
tion by industry between zaibatsu and non-zaibatsu firms. If we compare ROE by industry, the
zaibatsu firms tend to outperform the average. Out of 30 comparable cases across the three sub-
periods, the ROE of the zaibatsu firms was higher than the average in 18 cases.
In order to compare profitability between the zaibatsu and non-zaibatsu firms more formally,
we may regress the ROE to (a) paid-in capital (CAPITAL), (b) a dummy variable which is 1 if the
 The Role of Holding Companies in Pre-war Japanese Economic Development 257

Table 6. ROE of 30 Major Zaibatsu Firms by Industry

Average paid-in Average ROE

capital

Number 1922 1936 1922– 1922– 1927– 1932–

of firms 1936 1926 1931 1936

Total 30 25,666 38,654 8.4 10.2 5.7 9.5

Finance 5 37,500 64,050 11.2 13.5 9.5 10.7
Mining 3 54,875 67,433 8.5 6.9 7.6 11.0
Metals 3 20,833 18,333 2.6 2.0 –4.9 10.4
Machinery 6 11,958 27,000 8.2 9.1 4.0 11.4
Chemicals 2 8,438 21,250 13.5 14.2 8.1 18.3
Paper 0 – – – – – –
Ceramics 2 12,363 44,323 10.6 14.7 8.7 8.4
Textiles 0 – – – – – –
Foods 0 – – – – – –
Electricity and gas 1 14,000 34,687 11.1 13.1 10.8 9.4
Land transportation 0 – – – – – –
Shipping 1 58,000 64,250 3.2 3.7 2.0 4.1
Commerce 3 43,333 47,500 9.3 9.3 9.2 9.0
Real estate/warehousing 4 10,000 11,875 6.1 10.6 6.4 1.1

Source: Osakaya Shoten ed. Kabushiki Nenkan, various issues, HCLC (1951); Business reports of each company.

firm is zaibatsu-affiliated and 0 otherwise (ZAIBATSU), (c) industry dummies (INDUSTRY), (d) year
dummies (YEAR), and (e) constant. (a) is included to control for the scale effect, (c) to control for
industry-specific shocks, and (d) to control for macro-shocks. Our hypothesis is that the
ZAIBATSU coefficient is positive, because the zaibatsu holding companies intensively monitored
their affiliated companies, using the organization and devices discussed in the previous section. The
panel data of the above 135 firms from 1922 to 1936 generates 2,025 samples.
Equations (1)–(3) of Table 8 were estimated by the ordinary least square method (OLS) using
all the samples. Equation (2) shows that, as expected, the ZAIBATSU coefficient is positive and
statistically significant at the 1% level, if scale effect, industry-specific shocks and macro shocks are
controlled for. Furthermore, the magnitude of the zaibatsu effect is substantial. Because the ROE
is measured by %/year, the estimated equation implies that, on average, the ROE of a zaibatsu-
affiliated firm is 3.651% higher than that of a non-zaibatsu firm, if scale effect, industry-specific
shocks and macro-shocks are controlled for.
This result proves robust if we split the samples into three sub-periods. In Table 9, equations were
estimated by OLS with the samples for 1922–1926, 1927–1931 and 1932–1936. For all three
periods, the ZAIBATSU coefficient is positive and large. For 1922–1926 and 1932–1936, they
are also statistically significant at the 1% level.
These results support our hypothesis on the governance function of the zaibatsu holding company.
It might be argued from the perspective of the ‘monopoly approach’, that the high profitability of
258 OKAZAKI Tetsuji

Table 7. ROE of 105 Major Non-zaibatsu Firms by Industry

Average paid-in Average ROE

capital

Number 1922 1936 1922– 1922– 1927– 1932–

of firms 1936 1926 1931 1936

Total 105 17,962 40,126 9.1 11.1 7.3 8.7

Finance 4 10,794 36,948 8.1 5.0 9.0 10.5
Mining 4 24,406 27,031 4.2 6.5 3.8 2.3
Metals 4 30,875 52,788 4.2 12.2 –6.5 6.9
Machinery 1 13,125 30,355 11.9 2.7 2.1 30.9
Chemicals 10 22,271 23,897 3.3 10.1 –6.3 6.2
Paper 2 30,250 38,500 3.1 3.5 3.1 2.7
Ceramics 8 19,067 35,785 12.9 15.7 7.8 15.3
Textiles 14 15,420 28,172 11.6 13.5 10.0 11.4
Foods 2 15,000 17,125 12.7 16.1 12.5 8.4
Electricity and gas 21 9,824 24,064 8.3 10.3 8.7 6.0
Land transportation 32 20,945 61,387 10.7 11.7 11.5 8.9
Shipping 1 1,387 10,154 10.8 14.4 6.8 13.5
Real estate/warehousing 1 31,500 187,491 13.1 16.4 11.7 11.4
Commerce 1 17,500 17,500 5.1 4.2 5.4 5.6

Source: Osakaya Shoten ed. Kabushiki Nenkan, various issues, HCLC (1951); business reports of each company.

zaibatsu-affiliated companies reflects monopoly rents. However, if monopoly rents are based on price
control, they should be distributed across firms in the same industry, whether affiliated to zaibatsu
or not.
One might also wonder if the profitability of the zaibatsu shown in Tables 8 and 9 could have
resulted from their access to managerial resources and close ties with the government.12 It is not
easy to discriminate our governance hypothesis from the hypothesis of resource access and
government ties quantitatively, but Equation (3) in Table 8 is suggestive. If resource access and
government ties were the main reason for the high profitability of zaibatsu firms, their effects ought
to be relatively large in the newly developing sectors, such as the heavy and chemical industries.
However, the coefficient of the intersection term of ZAIBATSU and the dummy variable (HCI),
which is 1 if the firm is in the heavy and chemical industries, and 0 if otherwise, is negative and
statistically insignificant. This suggests that the effects of resource access and government ties were
not significant in explaining the high profitability of the zaibatsu firms.
In Tables 8 and 9, regression results excluding the industry dummies are also reported. In this
case, the ZAIBATSU coefficient is negative in the equations for 1922–1936, 1922–1926 and 1927–
1931, although the results are not statistically significant. On the other hand, in the equation for

12. I owe this point to the anonymous referees.

 The Role of Holding Companies in Pre-war Japanese Economic Development 259

Table 8. Regression Analysis of ROE

(1) (2) (3)

Constant 10.559 (7.001)*** 4.310 (1.693)* 4.169 (1.589)

CAPITAL –0.019 (–1.876)* –0.025 (–2.490)** –0.003 (–2.499)**
ZAIBATSU –0.233 (–0.257) 3.651 (3.125)*** 3.836 (2.682)***
INDUSTRY
Finance 2.386 (1.040) 2.476 (1.062)
Mining 2.125 (0.774) 2.503 (0.776)
Metals –0.717 (–0.249) –0.288 (–0.083)
Machinery 2.194 (0.923) 2.534 (0.899)
Chemicals 5.919 (2.231)** 6.007 (2.239)**
Paper 11.635 (2.410)** 11.794 (2.416)**
Ceramics 5.846 (1.864)* 5.872 (1.871)*
Textiles 8.966 (3.697)*** 9.115 (3.623)***
Foods 10.384 (3.957)*** 10.535 (3.888)***
Electricity and gas 8.392 (3.692)*** 8.540 (3.608)***
Land transportation 5.532 (2.373)** 5.681 (2.343)**
Shipping 0.904 (0.321) 1.019 (0.356)
Commerce 5.417 (1.985)** 5.458 (1.995)**
ZAIBATSU*HCI –0.558 (–0.224)
ad-R2 0.0099 0.0311 0.0306

Notes:
1. Each equation includes year dummies, although not reported.
2. t-values in parentheses.
3. ***Significant at 1% level; **significant at 5% level; *significant at 10% level.

1932–1936, the ZAIBATSU coefficient is positive and statistically significant at the 5% level. These
results can be interpreted as reflecting the distribution of firms by industry and the strategy of
the zaibatsu within it. As mentioned above, zaibatsu invested heavily in the declining/stagnating
industries and the newly developing industries. The zaibatsu strategy of shifting investment from the
former industries to the latter was rewarded in the 1930s.

5. The Governance Function of Zaibatsu in the Capital Market

Gisuke Ayukawa, head of the Nissan zaibatsu, saw Nissan’s role as follows:
The job of Nissan resembles that of a gardener. Nissan buys various seeds and young plants, and grows
them by letting them bathe in the sun, and by supplying water and fertilizer. If they bear flowers and fruits,
Nissan distributes them to its shareholders. Also, if a rare tree or a good plant stagnating in the shade
is noticed, Nissan buys it at a low price to cultivate it by changing soils and trimming. Furthermore, it has
the skill of grafting, to make plum flowers blossom on a peach tree. (Ayukawa 1937: 165–166)

Nissan’s function, which Ayukawa discusses here figuratively, is that of a takeover raider, as described
by Williamson (1975). Nissan would identify firms underperforming due to a low level of development
 260

Table 9. Regression Analysis of ROE

1922–1926 1927–1931 1932–1936

OKAZAKI Tetsuji

(1) (2) (3) (4) (5) (6)

Constant 9.380 (25.152)*** 2.360 (1.894)* 7.096 (2.814)*** 1.286 (0.204) 9.858 (14.639)*** 0.258 (0.174)
CAPITAL –0.011 (–2.167)** –0.019 (–3.665)*** –0.032 (–1.235) –0.043 (–1.588) –0.011 (–1.735)* –0.016 (–2.709)***
ZAIBATSU –0.601 (–1.118) 2.501 (3.706)*** –1.542 (–0.612) 5.269 (1.618) 1.542 (2.349)** 3.688 (4.784)***
INDUSTRY
Finance 5.545 (4.191)*** –3.719 (–0.513) 7.765 (5.145)***
Mining 4.309 (2.724)*** 2.141 (0.280) 7.003 (3.880)***
Metals 3.849 (2.319)** –9.007 (–1.123) 13.807 (7.294)***
Machinery 3.619 (2.650)*** 4.237 (–0.640) 8.636 (5.546)***
Chemicals 8.511 (5.558)*** 5.235 (0.708) 12.987 (7.430)***
Paper 11.007 (3.940)*** 11.322 (0.845) 13.966 (4.341)***
Ceramics 5.634 (3.112)*** 3.202 (0.366) 8.863 (4.291)***
Textiles 9.624 (6.877)*** 8.465 (1.252) 12.535 (7.848)***
Foods 9.867 (6.513)*** 6.537 (0.894) 16.556 (9.574)***
Electricity and gas 9.038 (6.875)*** 10.657 (1.683)* 10.347 (6.880)***
Land transportation 5.620 (4.176)*** 6.971 (1.072) 7.130 (4.642)***
Shipping 1.006 (0.620) 1.409 (0.180) 3.229 (1.746)*
Commerce 4.522 (2.873)*** 4.115 (0.541) 6.392 (3.560)***
ad–R2 0.0028 0.1080 0.0004 0.0144 0.0215 0.2250

Notes:
1. Each equation includes year dummies, although not reported.
2. t-values in parentheses.
3. ***Significant at 1% level;**significant at 5% level;*significant at 10% level.
 The Role of Holding Companies in Pre-war Japanese Economic Development 261

or bad management, and buy them out to provide them with financial and technological support
and to improve management. If these firms became profitable, Nissan would distribute the profit to
its shareholders. In some cases, Ayukawa wrote, Nissan would sell the firms to earn capital gains.
Do Ayukawa’s claims stand up? Table 10 shows all cases where a company was established by the
Mitsui, Mitsubishi, Sumitomo, Yasuda, Nissan or Asano zaibatsu by acquiring existing companies.
We see that zaibatsu other than Nissan acquired companies mainly in the 1920s, while Nissan, the
‘new zaibatsu’, pursued an aggressive M&A strategy in the 1930s. To this extent, Ayukawa’s charac-
terization of Nissan as a takeover raider appears well-grounded.
This section focuses on four cases that occurred in the period from 1925 to 1933, namely
those of Sumitomo Life Insurance (Sumitomo Seimei), Tokyo Steel (Tokyo Kozai), Nihon Flour
Mill (Nihon Seifun), and Nippon Electric Co. (NEC; Nihon Denki). These four were selected for
convenience, as they can be studied using the same financial database as in the previous section.

5.1 Sumitomo Life Insurance

The predecessor of Sumitomo Life Insurance was Hinode Life Insurance, founded in 1907 by
Toshiyuki Okamoto, president of a Japanese branch of a US life insurance company. Hinode Life
Insurance fell into financial distress after World War I. Okamoto asked Shimogo Denpei, the president
of Ninju Life Insurance, to buy the company, and the Shimogo family duly did so in 1921 (Sumitomo
Life Insurance 1977: 11–13). However, even after acquisition by Shimogo, Hinode showed no
improvement. There was still a persistent gap between the growth rate of insurance contract volume

Table 10. Acquisitions by Zaibatsu

Year acquired Year established Name of zaibatsu

Tokyo Fire 1896 1887 Yasuda

Hokkaido Coal Mine and Shipping 1899 1889 Mitsui
Shikoku Bank 1907 1896 Yasuda
Chugoku Railways 1909 1896 Yasuda
Kyushu Coal Mine and Shipping 1911 1907 Mitsubishi
Keihin Canal 1920 1917 Asano
Nihon Paper Industry 1922 1913 Yasuda
Nihon Chuya Bank 1922 1898 Yasuda
Daisan Bank 1923 1895 Yasuda
Izula Mining 1924 1918 Mitsubishi
Sumitomo Life Insurance 1925 1907 Sumitomo
Tokyo Steel 1926 1917 Mitsubishi
Nihon Flour Mill 1928 1896 Mitsui
NEC 1932 1899 Sumitomo
Nihon Fishery 1934 1925 Nissan
Nihon Fat 1934 1921 Nissan
Osaka Manufacturing 1934 1913 Nissan
Nihon Chemical Industry 1937 1934 Nissan
Nihon Victor 1937 1927 Nissan

Source: Company histories.

262 OKAZAKI Tetsuji

between Hinode and the average of Nihon Life Insurance (Nihon Seimei) and Teikoku Life Insurance
(Teikoku Seimei), the top two companies (Table 11).
Meanwhile, Sumitomo Goshi was planning to enter the life insurance industry, on the grounds
that it was protected by government regulation and was complementary with its banking and trust
activities. To overcome regulatory barriers to new entrants, Sumitomo intended to acquire an existing
company (Sakudo 1982: 223–224). When Shimogo asked Sumitomo Bank to refinance his acquisition
of Hinode, Ogura Masatsune, the executive director of Sumitomo Goshi, instructed the Research
Section of Sumitomo Bank to analyse Hinode. The Research Section concluded that Sumitomo
should acquire the company.
In April 1925, the patriarch of the Sumitomo family (Sumitomo Kichizaemon) and the General
Director of Sumitomo Goshi (Nakata Kinkichi) approved the acquisition. After negotiations with
Shimogo, Sumitomo Goshi bought all his Hinode shares (Hashimoto 1992: 126–127; Sumitomo
Life Insurance 1977: 14–17). At the Hinode shareholders’ meeting in June 1925, the Hinode board
of directors was completely reorganized. Kokubu Sei’ichi, who had been the main office manager
of Sumitomo Bank, became Hinode’s executive director, and Sumitomo men took eight of the ten
directorships. Only the former president of Hinode, Fukushima Yukinobu, was retained, and he only
as a regular director. A year later, in May 1926, Hinode was renamed Sumitomo Life Insurance
(Sumitomo Seimei), and became a core affiliated company of Sumitomo.
Sumitomo Life actively increased its network of branch offices and developed new insurance instru-
ments, resulting in the growth of insurance contracts. The growth rate substantially increased after

Table 11. Performance of Hinode and Sumitomo Life Insurance

Value of insurance Growth rate Difference from the average

contracts (%/year) of Nihon and Teikoku
(thousand yen) Life Insurance
(%/year)

1922 21,036 7.2 –3.5

1923 22,032 4.7 –4.3
1924 23,141 5.0 –5.9
1925 26,349 13.9 3.8
1926 35,768 35.7 29.4
1927 50,681 41.7 36.3
1928 74,441 46.9 36.4
1929 98,505 32.3 17.0
1930 119,447 21.3 7.7
1931 142,857 19.6 7.9
1932 169,470 18.6 10.2
1933 215,434 27.1 12.5
1934 272,824 26.6 9.1
1935 357,318 31.0 13.6
1936 462,046 29.3 5.2

Note: The bold denotes the year of acquisition.

 The Role of Holding Companies in Pre-war Japanese Economic Development 263

1925, as Sumitomo Life overtook Nihon Life and Teikoku Life (Table 11). In other words, acquisition
by Sumitomo was a turning point for this company.

5.2 Tokyo Steel

Tokyo Steel was established in 1917, taking over the operations of Tokyo Steel Manufacturing
(Tokyo Kozai Seisakujo), a company originally founded in 1916 by an engineer of Kanegafuchi
Cotton Spinning (Kanegafuchi Boseki). It became involved with the Mitsubishi zaibatsu through a
loan of 500,000 yen from the Banking Department of Mitsubishi Goshi in 1917 (Mitsubishi Steel
1985: 81–82).
In 1919, Tokyo Steel went into deficit, because of declining prices and excess inventory of products
and raw materials. The firm tided over this crisis with the support of Mitsubishi Bank, but hit a dead
end in 1925, stricken by damage from the great earthquake of 1923 and further price declines (ibid.,
95–99, 109). Tokyo Steel, whose paid-in capital was 2,000,000 yen, owed more than 2,000,000 yen
to Mitsubishi Bank, besides 1,400,000 yen to other creditors. As some of those other creditors tried
to seize Tokyo Steel’s assets, the firm was frequently faced with bankruptcy (ibid., 110).
Faced with this situation, Iwasaki Koyata, the president of Mitsubishi Bank and Mitsubishi Goshi,
instructed Kato Takeo, the executive director of Mitsubishi Bank, to resolve the Tokyo Steel problem.
At Kato’s request, a six-man team from Mitsubishi Ironworks (Mitsubishi Seitetsu), one of the zaibatsu’s
core affiliated companies, investigated Tokyo Steel. Their report to Mitsubishi Bank concluded thus:
Tokyo Steel will not recover unless substantial new funding is invested. However, because its business is
indispensable to the industries of Japan, it would be a great loss for our nation to let it go bankrupt. On
the other hand, if a substantial amount of new money is invested to improve its operations, it will not go
into deficit in future. (Mitsubishi Steel 1985: 111)

Based on this report, Mitsubishi Bank proposed an emergency loan to Tokyo Steel, on condition
that the loan should not be used for paying off existing debt. It was eventually agreed that 20% of
the debt from other creditors would be repaid from the emergency loan, and the other 80% written
off. The other creditors accepted the deal.
Mitsubishi Bank did not originally intend to take over Tokyo Steel. However, in the process of the
rescue operation a third party tried to take over Tokyo Steel, prompting Mitsubishi Bank to add as
a condition of the emergency loan that more than half of Tokyo Steel’s shares should be negotiated
to it in order to secure control of the company. Tokyo Steel accordingly sold some 80% of the stock
to Mitsubishi Bank in 1925 (ibid., 112–118). Prior to that, all the top ten shareholders had been
individuals, each with just 1–5% of the shares. In July 1926, the board of directors was totally
reorganized, and all but one of the directorships were taken by people from Mitsubishi Iron Works.
After the acquisition, ‘organization, rules and office procedures were reformed, and the corporate
culture was repainted in Mitsubishi colors’ (Mitsubishi Steel 1985: 119–121). After the acquisition,
Tokyo Steel’s ROE, which had been below average for the metals industry, rose above the average.
Although ROE fell during the depression from 1929 to 1931, it exceeded the average again in the
1930s (Table 12).

5.3 Nihon Flour Mill

Positive effects on corporate performance of acquisition by zaibatsu were observed more clearly
in the case of Nihon Flour Mill (NFM; Nihon Seifun). Established in 1896, this firm rivalled Nisshin
Flour Mill (Nisshin Seifun) for leadership of the flour industry. In the early 1920s, NFM developed
relations with Suzuki Shoten, a major trading company that grew rapidly during World War I. It
264 OKAZAKI Tetsuji

Table 12. Performance of Tokyo Steel

Paid-in Capital ROE Difference from the average

(thousand yen) (%/year) of the metal industry
(%/year)

1922 3000 2.1 –5.0

1923 3000 5.5 –0.2
1924 2000 6.6 4.8
1925 2000 –9.5 –8.2
1926 400 –0.5 1.8
1927 400 –0.4 3.8
1928 400 –1.0 0.3
1929 400 0.5 –0.2
1930 400 –14.5 –11.0
1931 400 –84.5 –75.3
1932 400 15.0 5.9
1933 1000 48.5 27.9
1934 2000 40.9 23.3
1935 2000 19.2 3.3
1936 5000 12.4 –2.2

Note: The bold denotes the year of acquisition.

became increasingly dependent on Suzuki as its financial condition deteriorated (Nihon Flour Mill
1987: 37–42). In 1922, Suzuki became top shareholder with a 13.1% holding.
In the 1920s, NFM’s ROE was around 10%, relatively low for the foods industry and below that
of its rival, Nisshin Flour Mill (Table 13). The firm was seriously damaged by unsuccessful wheat
speculation in 1924, and attempted to negotiate a merger with Nisshin Flour Mill in October 1926.
Nisshin pulled out at the last minute, on the grounds that NFM’s debts were larger than expected.
The news sent NFM’s stock price plunging from 54.0 yen in October 1926 to 13.4 yen in January
1927. The firm was struggling to get its bills discounted (Nihon Flour Mill 1987: 43–44).
Suzuki persuaded Taiwan Bank, a special bank based on the Taiwan Bank Law, which had intimate
relations with Suzuki, to provide a rescue loan. NFM reduced its capital by three-quarters to clear
the deficit, subsequently increasing it again to replace the loan from Suzuki, which had given loans
to NFM before the Taiwan Bank loan. This increased Suzuki’s share of the NFM stock to 72.8%.
At the same time, Kubota Komakichi, the chief of Suzuki’s Tokyo branch, was installed as president
of NFM, and two more directors were dispatched, one from Suzuki and the other from Taiwan
Bank (Nihon Flour Mill 1987: 45). NFM commenced restructuring under the control of Suzuki
and Taiwan Bank.
The financial crisis of 1927 proved catastrophic, however. Suzuki and Taiwan Bank were both bank-
rupted, and the NFM reconstruction scheme collapsed. The beleaguered firm turned to Mitsui & Co.
(Mitsui Bussan), with which it had trading connections. In March 1928, a new board of directors
was installed, with Yasukawa Yunosuke, the executive director of Mitsui & Co., as chairman. Five of
 The Role of Holding Companies in Pre-war Japanese Economic Development 265

Table 13. Performance of Nihon Flour Mill

Paid-in ROE Difference from Difference from Stock Stock price

capital (%/year) food industry Nisshin Flour price of Nisshin
(thousand average Mill (yen) Flour Mill
yen) (%/year) (%/year) (yen)

1922 5,625 10.0 –2.7 –11.0 42.7 85.6

1923 6,810 9.2 –7.8 –9.1 40.7 101.8
1924 8,296 13.3 –6.7 –11.8 44.0 99.8
1925 8,390 12.6 –2.9 –8.4 53.6 104.3
1926 10,720 –76.2 –90.6 –91.3 47.8 99.3
1927 11,075 –154.1 –170.5 –168.5 12.7 91.5
1928 11,075 0.5 –1.8 –14.5 – 103.2
1929 3,938 7.6 0.1 –7.7 55.5 88.8
1930 3,938 9.7 3.3 –3.6 40.3 75.5
1931 3,938 11.0 5.7 –0.9 41.9 79.1
1932 3,938 20.2 9.5 8.6 59.0 85.6
1933 3,938 25.2 11.5 12.1 71.2 83.2
1934 5,953 13.1 –2.2 1.0 69.2 78.7
1935 7,969 17.7 –0.1 2.3 76.3 76.8
1936 7,969 15.5 –3.4 0.6 71.6 81.7

Note: The bold denotes the year of acquisition.

the seven directors were affiliated to Mitsui, including Yasukawa and the executive director, Nakamura
To’ichi. At the same time, the NFM shares held by Taiwan Bank were bought by Mitsui at 25 yen
per share. Mitsui thereby became the firm’s dominant shareholder, with more than 60% of the shares
(Nihon Flour Mill 1987: 46–49).
Under Mitsui’s leadership, NFM reformed its organization, concentrating power in the head-
quarters, which came to control procurement, marketing and financing for the whole company, besides
monitoring branch performance (Nihon Flour Mill 1987: 49–50). After the Mitsui acquisition,
NFM’s performance improved sharply. In 1929, ROE exceeded the average for the foods industry
and, in 1932, it surpassed that of Nisshin Flour Mill (Table 13). The stock price rose substantially.
At the 1935 average of 76.3 yen, the 48,000 shares that Mitsui & Co. had bought in 1928 brought
about capital gains of 2,460,000 yen.

5.4 NEC
NEC (Nihon Denki) was established by two Japanese engineers jointly with Westinghouse of the
US in 1899. Westinghouse held 54% of the NEC shares, transferring them in 1918 to International
Western Electric (IWE), established by Westinghouse that year to manage its affiliated companies
abroad. In 1920, NEC and Westinghouse tied up with Sumitomo Cable Manufacturing (Sumitomo
Densen Seizojo) to transfer telephone cable patents. NEC acquired 25% of Sumitomo Cable’s shares,
while Sumitomo Cable, in turn, acquired 5% of NEC’s shares. NEC and Westinghouse dispatched
directors to Sumitomo Cable, while Nakata Kinkichi, a director of Sumitomo Goshi, was installed
266 OKAZAKI Tetsuji

as a director of NEC (NEC 1972: 107). This brought NEC into a relationship with the Sumitomo
zaibatsu. In 1925, IWE was acquired by International Telephone and Telegraph (ITT) and renamed
International Standard Electric (ISE).
In the late 1920s, the government’s tight fiscal policy was a blow to NEC, which relied on public
procurement of telephone equipment. The ‘buy Japanese’ policy was a second blow, since more
than half of NEC’s shares were held by a foreign company. ITT and ISE’s countermeasures entailed
entrusting NEC to a Japanese company. In 1932, ISE and Sumitomo Goshi made a contract under
which ISE exchanged 36,064 shares in NEC for the same number of shares in Sumitomo Cable
from Sumitomo Goshi. Sumitomo Goshi participated in the management of NEC alongside ISE.
Sumitomo Goshi acquired the power to appoint NEC’s top management. It also bore ultimate
responsibility for NEC’s management policy, reporting regularly to ISE (NEC 1972: 157).
The deal took ISE’s share of the NEC stock below 50%, while that of Sumitomo Goshi and
Sumitomo Cable rose to 14%. At the same time, Sumitomo Goshi appointed Akiyama Takesaburo,
its executive director, as chairman of NEC, and Fumio Shida, chief engineer at Sumitomo Cable, as
executive director (NEC 1972: 159–160).
After Sumitomo acquired control of NEC in 1932, its performance improved. On the other hand,
unlike the three previously described cases, ROE did not rise relative to the average for the firm’s
competitors (Table 14). However, this case does not contradict the hypothesis of effective govern-
ance by zaibatsu, because special conditions applied. NEC was a joint venture with a foreign company.
Since 1926, ISE had placed three directors on the NEC board, two of whom resided in Tokyo.
Directorial appointments had to be approved by ISE ex ante. Other matters of importance required
ex ante consultation with ISE. ISE enforced budget control, and American accountants had audited
NEC’s accounts monthly (NEC 1972: 141–142). In other words, NEC had already been intensively

Table 14. Performance of NEC

Paid-in ROE Difference from the Difference from the

Capital (%/year) average of the machinery average of the electric
(thousand yen) industry machinery industry
(%/year) (%/year)

1924 10,000 24.4 14.3 12.2

1925 10,000 30.2 20.2 18.7
1926 12,500 26.8 17.5 16.8
1927 15,000 20.7 22.8 13.4
1928 15,000 14.7 10.4 6.0
1929 17,500 12.3 4.7 4.9
1930 17,500 7.3 2.4 –1.4
1931 17,500 4.6 4.8 3.1
1932 17,500 4.1 2.1 1.1
1933 12,500 10.5 1.0 –1.7
1934 12,500 12.4 1.2 –2.9
1935 12,500 14.3 –0.5 –3.5
1936 12,500 17.2 2.0 0.1

Note: The bold denotes the year of acquisition.

 The Role of Holding Companies in Pre-war Japanese Economic Development 267

monitored by ISE, a company specialized in monitoring affiliated companies abroad, before it came
to be monitored by Sumitomo. Thus, it is in a sense natural that the relative level of ROE did not
rise against the electric machinery average after 1932.

6. Concluding Remarks
The holding companies of the zaibatsu had the organization and staffing required to monitor
affiliated companies affectively. In many cases, the holding company would check the budget and
financial data of the affiliated companies, and control important decisions. There were systematic
rules on the allocation of powers between the holding company and the affiliated companies, to
whom the holding company would also frequently dispatch directors.
The efficacy of these devices for corporate governance was tested quantitatively in this paper.
We compared ROE between zaibatsu-affiliated firms and non-zaibatsu firms, using panel data for
135 firms from 1922 to 1936. Controlling for the effects of company scale, industry-specific shocks
and macro-shocks, we found that zaibatsu affiliates significantly outperformed the other companies.
This result supports the hypothesis that the zaibatsu holding company played an effective role in
monitoring the affiliated companies.
Besides this governance function over affiliated companies, the zaibatsu also disciplined non-affiliated
companies in the capital market. As the case studies in Section 5 indicate, the holding companies
and the core affiliated companies frequently executed takeovers, which contributed to restructuring
the targeted companies, through replacement of the directors and managerial assistance.

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