Published by EH.NET (March 2003)


Shinji Ogura, Banking, the State and Industrial Promotion in Developing Japan, 1900-73. New York: Palgrave/Macmillan, 2002. xvii + 144 pp. $69.95 (hardcover), ISBN: 0-333-71139-4.

Reviewed for EH.NET by James Mak, Department of Economics, University of Hawaii at Manoa.

In this brief (120 pages of text) book, Professor Ogura recounts the evolution of commercial banking in Japan between 1900 and 1973 and the banking industry’s relationship with the state through the business history of Japan’s first (founded in 1876) private bank, the Mitsui Bank. The Mitsui Bank and a few others like it (e.g. Mitsubishi, Sumitomo, Yasuda, Dai-Ichi) were the in-house banks of the pre-WWII zaibatsu, which were large, family-owned business conglomerates. The Mitsui family owned the Mitsui Bank. Each of these zaibatsu-affiliated banks handled the banking affairs of all the firms that were affiliated with its family group. Japan’s major commercial banks today are descendants of these prewar zaibatsu-affiliated banks.

Trying to tell the story of commercial banking in Japan through the business history of one bank is a tricky endeavor. For readers like myself who are mainly interested in the big picture, too many company details can muddle the picture. Indeed, I found myself frequently turning back pages to reread paragraphs so I could reconnect the main themes in the book. I also found myself skipping over names and rushing through side-stories simply because I didn’t think they were essential to the story. Fortunately, the summaries at the end of each chapter and the preface (a must read!) do a very good job of bringing the reader back to the main arguments of the book.

Professor Ogura notes from the outset (preface) that the prewar zaibatsu-affiliated banks were quite different from the “main” banks of postwar corporate groups. Ogura defines a “main” bank as one that is not necessarily a company’s largest creditor but one that acts as its lender of last resort. He argues that the prewar family-owned zaibatsu-affiliated banks did not qualify as main banks because they were completely under the control of the zaibatsu families, and bank executives did not have independent discretion over the banks’ lending policies. For example, Ogura notes (p. 21) that some Mitsui Bank executives believed that the Mitsui family “damaged” the bank by forcing them to adopt an excessively conservative lending policy; sometimes the family also instructed bank executives to make loans to specific customers. Ogura notes that Mitsui Bank did not even act as the main bank to the Mitsui-affiliated companies (p. 28). Also, unlike the postwar main banks, the prewar zaibatsu-affiliated banks pretty much maintained an “arms length” relationship with their borrowers.

Until the 1930s, most of the zaibatsu-affiliated banks remained under the control of individual families. That began to change in the 1930s during the Showa depression and the outbreak of war with China in 1937. A rising volume of bad debts during the depression induced Mitsui Bank finally to act as the main bank — i.e. lender of last resort — to some of its major borrowers, among them Tokyo Electric Light Company, even though it was not a Mitsui affiliate. With the outbreak of war with China, the government directed the banks to provide long-term loans to (non-affiliated) munitions manufacturing companies and to purchase government bonds. This forced the banks to drastically change their lending policy and investment portfolios; among the zaibatsu-affiliated banks, Mitsui Bank, for example, had maintained the most conservative lending policy by focusing on short-term (i.e. working capital) rather than long-term loans. According to Ogura (here, the explanation gets a bit murky), faced with a serious shortage of loanable funds and concerns that loans to munitions companies would turn into bad debts after war, the bank saw that it could best address these problems by freeing itself from Mitsui family control. Ultimately, this led to a merger (approved by the Mitsui family) in 1943 between Mitsui and Dai-Ichi Bank, one of Japan’s five largest banks. The new bank — named Teikoku Bank — became Japan’s largest bank.

Japan was forced to break up the zaibatsu after the war. The idea was that breaking them up would reduce the concentration of economic and political power and reduce Japan’s ability to become once again a military threat. The Teikoku Bank became two separate banks — Mitsui and Dai-Ichi. The commercial banks were “back on their feet” by the autumn of 1948. Despite the dismantling of the zaibatsu (for example, in 1947 Mitsui and Company was broken up into more than two hundred separate companies) prewar business relationships persisted in Japan. By the late 1940s and early 1950s, the former zaibatsu-affiliated banks began to act as the main banks for major companies that were formerly members of the prewar zaibatsu. The six largest commercial banks competed vigorously to forge ties with major and promising companies. The relationship between firms belonging to large corporate groups (or keiretsu — a term not used by Ogura) became even more highly integrated than before the war. While prewar zaibatsu-affiliated banks tried to maintain a hands-off policy with companies with whom they did business, the postwar corporate groups scheduled regular meetings among the presidents of the affiliated companies and engaged in extensive ownership of each other’s stocks.

A recurring theme in Ogura’s book is the frequent tension between the state (i.e. the government) and the commercial banks in Japan both before and after the war. The conventional wisdom on the relationship between the state and industry in Japan is one of close co-operation. However, that does not mean that there was no friction between the two parties. While the banks may have desired to maintain a low portfolio risk by focusing on short-term lending, the government, by contrast, wanted to use the banks as instruments of state industrial policy, specifically, to promote economic growth. During and even some time after the war, the government directed the banks to make more loanable funds available and to allocate loans to targeted industries. The miraculous expansion of the Japanese economy in the postwar period resulted in huge demands by businesses for long-term credit. Main banks practiced credit rationing, allocating credit to the largest and most promising companies (not surprisingly bank services to consumers were slow to develop, even today). The banks co-operated amongst themselves to make loans available to each other’s customers when the main bank was unable to. During the 1970s, the large commercial banks and other financial institutions such as long-term credit banks and trust banks dramatically expanded their long term lending. Ogura argues (p. 120) that the competition among the financial institutions to increase their share of long-term capital lending “damaged the Japanese financial system and the economy as a whole as they led to excessive provision of long-term loans, particularly to real estate developers, and caused relatively weak players to over expand their international financing business,” and that this led to the “bubble economy” of the late 1980s. Others might argue that it was not so much “excessive competition” — to use a popular phrase in Japan — but weak bank rules and regulations and the unwillingness of the government subsequently to take the bitter pill of bank reform that produced the economic bubble of the late 1980s and the current banking crisis. Finally, in recounting the history of banking and its relationship with the state in Japan, Ogura curiously fails to mention the role of the postal savings bank, Japan’s largest “bank.”

James Mak is Professor of Economics, University of Hawaii at Manoa, Honolulu, Hawaii. Among his recent publications is (with S. La Croix), “Regulatory Reform in Japan: The Road Ahead,” in Japan’s New Economy: Continuity and Change in the Twenty-first Century, edited by Magnus Blomstrom, Byron Gangnes, and Sumner La Croix (London: Oxford University Press, 2001).