This paper argues that the ongoing restructuring process and big bang acceleration in Japan's financial sector precipitate changes in the organizational structure and corporate governance of the 'kigyo-shudan,' or bank-centered, enterprise groups. It pays particular attention to the effect of the government restructuring policies on the enterprise groups as they deal with these changes, and maintains that their structural transformation can best be understood if equal emphasis is placed on examining both institutional and economic factors.

The organizational structure of Japan's six enterprise groups - Mitsui, Mitsubishi, Sumitomo, Fuyo, Sanwa, and Dai-Ichi Kangyo - was considered to have been well entrenched since having been (re)established after World War II.
Typically classified as organizational isomorphisms, they are characterized by the 'keiretsu' structure, meaning a vertical alignment of firms of different sizes. Each enterprise group consists of member firms that are connected horizontally, often active in different industries. A member firm maintains vertically aligned and affiliated subsidiary firms. These subsidiary firms are, in addition, affiliated with many medium and small sized subcontracting firms ranked as either primary, secondary, or tertiary, depending on size and closeness. Also, each enterprise group has its own banks, insurance companies, and trading firms for the common financial and distributive needs of the member firms.

Once established, the organizational structure of the postwar business combine is considered to have become entrenched thereafter, referred to either as an 'intermarket group' (Dodwell 1984), or 'financial keiretsu,' or 'kigyo-shudan (enterprise group).' However, with the implementation of the major financial reform policies of the Japanese government after the economic recession of the 1990s aimed at revitalizing the economy, the keiretsu structure is considered to have entered a phase of rapid transition. If ongoing financial reform measures are implemented successfully, the kigyo-shudan will no longer be able to preserve their current structures, because financial institutions have so far acted as their de facto holding companies.

The financial reform measures include the enactment of the financial system reform law, legalization of the financial holding company, withdrawal of the full-deposit protection scheme, corporate accounting reform and the boosting of foreign competition. As a result of these measures, the unwinding of cross shareholdings in the enterprise groups is being accelerated, the role of capital market financing is increasing, greater transparency is required, the 'national' identity of the enterprise groups is withering and their internal labor market is changing.

The above statement implies that the current structural transformation of the Japanese enterprise groups is attributable not only to their efforts at adapting to the changing market environment, but also to the legitimizing efforts of the crisis-ridden state under environmental uncertainties. The 'political repercussions' of the economic crisis threatened the state and caused it to respond with counter-crisis policies for legitimation, in the form of socio-political and economic reforms. The policies of the legitimacy-pressured state led to the institutionalized sanctioning of the business practices and economic activities of the Japanese enterprise groups, resulting in controlled market behavior. As a result, the possibility is greater than ever that the keiretsu structure of the enterprise groups, preserved throughout the postwar period, will finally be transformed or may even disappear completely.

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Executive Summary

I. Introduction

II. The Significance of the Enterprise Groups in the Japanese Economy

III. The Financial Sector Reform

IV. The Intercorporate Structure in Transition

V. The Political Economy of the Structural Reform

VI. Conclusion

References

Appendix

Korean Abstract