How Corporate Japan Lost Its “Voice”: The Plight of Keidanren in the Post–Japan Inc. Era

Nippon Keidanren (Japan Business Federation), known as the voice of big business in Japan, will appoint Toray Industries Chairman Sakakibara Sadayuki as its next leader at the federation’s general meeting on June 3 this year. The organization was obliged to draft Sakakibara after efforts to tap one of its active vice-chairmen for the job ran aground. Sakakibara served as vice-chairman until 2011 but has not been actively involved in the organization’s leadership in the interim.

Toray Industries Chairman Sakakibara Sadayuki, the next leader of Keidanren. (Photo: Sankei Shimbun)

This is the second time in a row that Keidanren has departed from its long-established practice of choosing a chair from among its active vice-chairmen. Current Chairman Yonekura Hiromasa had also withdrawn from active duty when he was tapped to lead Keidanren four years ago. (He held the essentially honorary post of chairman of the Board of Councillors at the time). Even with 18 vice-chairmen to choose from, the federation was forced to look farther afield to find a willing successor to Yonekura.

The chairman of Keidanren, a business federation renowned for its economic and political clout, once held the informal title of “prime minister of the business world.” The organization’s recent difficulty in recruiting a suitable leader speaks volumes about its declining power and prestige over the past two decades.

Keidanren’s recent decline can be attributed to three basic factors. The most fundamental is Japan’s changing political and economic structure. The second is Keidanren’s failure to draft principles and policies adapted to these new circumstances. And the third is the advancing age of the federation’s top brass and the resulting decline in creative and innovative leadership.

Phase I: Building the “Iron Triangle”

Keidanren (formerly known in English as the Japan Federation of Economic Organizations) was established in August 1946, just about a year after the end of World War II, to replace and consolidate the “control associations” that had assisted the Japanese government in mobilizing key industries during World War II. In fact, Keidanren’s first chairman, Ishikawa Ichirō (1885–1970), had earned the sobriquet “god of industrial mobilization” as head of the Chemical Industry Control Association. At this early stage, the function of Keidanren was simply to convey the wants and needs of Japan’s devastated business community to the US Occupation authorities and the Japanese government.

It was only after Toshiba President Ishizaka Taizō (1886–1975) succeeded Ishikawa in 1956 that Keidanren began to acquire serious clout. The nation’s conservative forces had merged in 1955 to form the Liberal Democratic Party of Japan, which was to rule continuously for the next 38 years, and the postwar economic miracle was underway. As chairman of Keidanren during the rapid-growth era, Ishizaka sought to unify the voice of the business community and push for greater liberalization of trade and investment.

Internationally, the Cold War was escalating, and Japan had emerged as a key regional battleground in the political and ideological clash between the Eastern and Western blocs. Alarmed over the possibility of a socialist takeover in Japan, Keidanren began to function as conduit for political donations, funneling funds from corporations to the LDP as the “cost of preserving the capitalist system.” At a time when the prime minister was invariably the president of the LDP, Keidanren’s financial sponsorship of the ruling party gave the organization tremendous leverage over the nation’s top decision maker. During this era, Ishizaka’s forceful leadership during 12 years in office earned him the title “prime minister of the business world.”

As a latecomer to industrial capitalism, Japan had relied heavily on the bureaucracy to plan and control economic activity ever since its emergence as a modern state in the Meiji era (1868–1912). Under the LDP, bureaucrats continued to influence the conduct and fortunes of big business through such non-statutory measures as “administrative guidance.” The bureaucrats, meanwhile, were subject to pressure from the ruling party’s politicians, who made the laws of the land. And as a key source of political funding for the LDP, big business naturally influenced the ruling party’s politicians. During Japan’s period of rapid economic growth, this “iron triangle”—in which the bureaucracy held sway over industry, the ruling party held sway over the bureaucracy, and industry held sway over the LDP—supported the LDP power structure and played a central behind-the-scenes role in policymaking. Keidanren dominated and supported the business side of this iron triangle.

Phase 2: Big Manufacturing and the Heyday of Japan Inc.

Another major business organization that took shape in the aftermath of World War II was Nikkeiren (Japan Federation of Employers’ Associations), established in 1948 to duel it out with the radical labor movement that emerged around the same time. Later, as rapid growth boosted worker incomes and radical labor receded into the background, Nikkeiren presided over an era of close labor-management collaboration. Sakurada Takeshi (1904–85), president and CEO of Nisshinbō Industries, steered the organization in various positions for three decades, until he finally stepped down in 1979. Sakurada had a reputation among political and business leaders alike as a straight-shooting man of principle. Between them, Ishizaka and Sakurada exercised strong leadership during the years when Japan was emerging as an economic superpower thanks to booming exports in the manufacturing sector.

Big business reached the height of its power and prestige in the 1980s, as Japan took its place as the world’s second-largest economy and began closing in on the United States. Indeed, the Japanese were fond of noting that they had a third-rate government but a first-rate economy. During these years, leadership of Keidanren rotated among the top executives of the nation’s giant blue-ribbon corporations—companies like Nippon Steel, Toyota Motor Corp., and TEPCO (Tokyo Electric Power Company). To be eligible for the top post, a corporate executive had to have a support staff of about 100 employees in a company that had earned its place near the top of the Keidanren pecking order with generous annual contributions, including political donations. Such criteria effectively excluded all but the biggest corporations.

Many of the member companies farther down the food chain survived by supplying these heavy hitters with materials and components or shipping and distributing their goods. Lower-ranking Keidanren officers were sure to go along with the chairman’s policies if he was the chief executive officer of one of their biggest clients.

Globalization and the Last Days of Japan Inc.

The foundations of Keidanren’s political clout began to disintegrate in the 1990s, when the collapse of the bubble economy and the end of the Cold War triggered a major upheaval in Japan’s political and economic structure.

On the political front, the LDP’s longstanding monopoly on power came to an end in 1993 with the rise of an eight-party coalition led by Prime Minister Hosokawa Morihiro. Faced with a new and uncertain political environment, Keidanren suspended the practice of soliciting and funneling political contributions from its members. Later, when the LDP returned to power, it resumed its fundraising role in a somewhat different capacity, restricting itself to “recommending” the party or parties deemed deserving of member contributions on the basis of policy. After the 2009 electoral victory of the Democratic Party of Japan, which pledged to put an end to corporate donations, it again halted its political fundraising activities.

The economic upheaval began even before the collapse of the 1980s bubble. The rapid appreciation of the Japanese yen in the wake of the 1985 Plaza Accord pushed Japan headlong into the age of globalization, as manufacturing industries shifted production offshore and entered into a series of mergers and acquisitions in an effort to remain internationally competitive. Imports from newly industrializing countries rose dramatically, and manufacturing jobs continued to flow overseas, while the service and information industries took over an ever larger share of the economy.

After the collapse of the bubble economy plunged the nation into recession and deflation, it became increasingly apparent that the “iron triangle” and its collusive arrangements were standing in the way of deregulation and economic revitalization. It was time to dismantle “Japan Inc.”

All these changes have greatly diminished Keidanren’s relevance. With the Cold War a distant memory, financial sponsorship of the LDP can no longer be justified as the price of a free economy. Keidanren’s lobbying role is growing obsolete as well; now that Japanese corporations have shifted so much of their economic activity overseas, they are less dependent on Keidanren’s intercession. In addition, the manufacturing industries that continue to dominate the organization are playing an ever-dwindling role in the nation’s economy. As chairman of a synthetic fiber and plastics manufacturer, Sakakibara may well believe that “manufacturing powered by innovation is the backbone of Japan,” but the shift toward service and information industries continues unabated.

Atrophy and Indecision

In 2002, Keidanren merged with Nikkeiren, whose membership largely mirrored its own, in a bid to streamline and rationalize Japan’s big business lobby. But its outdated leadership structure and organizational practices—the product of a 70-year history—have remained deeply entrenched. Even now Keidanren’s top brass is dominated by the “old guard” of Japanese business: executives of Japan’s largest manufacturing, chemical, and energy companies, big-name corporations descended from the prewar zaibatsu combines, and top-tier banking and securities firms. Often these posts are passed down in a hereditary fashion from one executive to his successor at the same firm.

In addition, Keidanren’s chairman, vice-chairmen, and other top officers are almost all elderly executives who have ceased to play an active role in corporate affairs and occupy a largely honorary position as chairman of or advisor to the Board of Directors. Current Keidanren Chairman Yonekura, chairman of Sumitomo Chemical, will turn 77 on March 31 this year, making him almost a generation older than 59-year-old Prime Minister Abe Shinzō. Vice-Chairman Kawamura Takashi, the 74-year-old Hitachi chairman who was initially favored to succeed Yonekura, firmly declined the honor on the grounds of age, arguing that “Keidanren shouldn’t be turned into an old men’s circle.” Chairman Designate Sakakibara will turn 71 on March 22.

The advanced age of Keidanren’s top brass has been an issue within the organization since the 1970s. The response has been to expand the administrative role of the Keidanren Secretariat, managed and staffed by permanent full-time employees. When the executive of a member company is scheduled to speak before a Keidanren committee, the Secretariat provides him with a written statement to read, and the Secretariat does not hesitate to confront those who depart substantially from its script. Nakamura Yoshio, who heads the Secretariat, took over chairmanship of the all-important Committee on Political Affairs—in addition to his duties as vice-chairman and director general of Keidanren—when none of the organization’s corporate members could be prevailed on to take the job. As Keidanren’s executives age, the federation has fallen under the control of its own internal bureaucracy.

Hampered by aging executives and bureaucratic control, Keidanren has yet to formulate a set of principles to lead Japanese business into the future. As a result, the federation’s recent positions lack consistency. Chairman Yonekura initially criticized as “reckless” the monetary easing policy pushed by Prime Minister Abe and adopted by Abe’s appointee, Bank of Japan Governor Kuroda Haruhiko. Then, after Abe expressed his displeasure, Yonekura did an about-face and became a whole-hearted supporter.

Exasperated with Keidanren’s rigidity and stagnation, Mikitani Hiroshi, president of the electronic commerce giant Rakuten withdrew from the association in 2011 and founded the Japan Association of New Economy, an economic organization centered on e-businesses. The Rakuten rebellion reinforced the widespread impression that the business hierarchy of the old economy—embodied in the Keidanren leadership—is slowly crumbling. Keidanren’s recent succession problems are yet another sign of the organization’s growing irrelevance, malaise, and indirection in the post–Japan Inc. era.

Chairman-to-be Sakakibara is a talented and accomplished business leader, but he will face daunting challenges at the helm of Keidanren. Reforming an organization this set in its ways is no easy task. And it remains to be seen whether Sakakibara can command real authority in Keidanren, given the scale of his company. Toray’s sales stand at about ¥1.6 trillion, well below the ¥10 trillion or so that some members consider appropriate for a Keidanren chairman’s company. As of the end of January, its market capitalization was about half that of the renegade Rakuten.

The only hope for the federation now is a bold act of creative destruction. Keidanren is an organization that has outlived its historical purpose. To regain some semblance of relevance, it must embrace a new mission and start over.

(Originally written in Japanese on February 2, 2014)

List of Chairmen of Keidanren

* Keidanren’s official English name changed following the merger of the former Keidanren (Japan Federation of Economic Organizations) with Nikkeiren (Japan Federation of Employers’ Associations)