The Zaibatsu of Japan practically ran the nation's economy. Over the span of many decades

going into the early 1900s, the families who owned these titanic businesses grew to possess

plutocratic amounts of wealth.

Unchecked expansionism allowed their industrial combines to become vast mini-economies within

the Japanese nation. But then, over a very short period of time, this vast wealth and

income inequality abruptly ended. These families lost their control and then their companies.

In this video, we are going to look at how Japan's richest families got to be so rich.

How the authorities came to attack and consume their fortunes. And what doing so meant for

the Japanese economy post-War.

Our story begins with Matthew Perry and the black ships forcing Japan's opening up in

the 1850s.

This traumatic event ended centuries of isolation, demonstrated the massive East-West industrial

gap, and humiliated the country.

The ruling Tokugawa military government attempted to close the gap and modernize the military.

The immense costs of doing so drained the treasury. In response, the shoguns debased

the currency and raised taxes, angering the populace including the merchants.

A group of samurai - fearful that what was happening to China at the time would happen

to Japan too - removed the shoguns from power. This movement would be known as the Meiji

Restoration. Concluding that the old regime of hereditary castes did not jive with modernization,

they instituted enormous changes in the country's political, social, and economic structure.

Under Shogun rule, the hereditary samurai class reigned as local lords over fiefdoms.

They received fixed stipends, burdening government budgets, and other societal privileges. The

Meiji leaders stripped away those privileges and converted their rice stipends into government

bonds.

Some in the samurai class attempted a brief rebellion, but for the most part they accepted

this new society. Many of these people, being well-educated, would competently serve as

professional business managers in this new era.

The Meiji government leaders sought to increase production and industry in order to avoid

Western colonization.

They quickly realized that if they wanted to rapidly industrialize a backwards nation,

entire supply chains had to be built. For instance, to build weapons, you need iron.

To get iron, you need to build iron foundries, railways to move them, and so on.

So the government founded many state owned enterprises or SOEs to lead this push. SOEs

were founded in railways, breweries, cement, textiles, ship building, weapons, and so on.

The goal was to make a big push towards building enough industrial capacity to replace whatever

was being imported from abroad.

These SOEs were not expected to make a profit at the start, so these losses had to be paid

for. So the Government nationalized Japan’s mines, declaring all underground minerals

state property. But by the late 1870s it became clear that SOE losses were threatening to

bankrupt the government.

Thus in the early 1880s, the government tried transferring these government-managed assets

to private hands. Many of these money-losing state owned enterprises were offered to potential

buyers at book value. They did not sell.

A failed privatization round in 1880 led the government to include some of its profitable

SOEs in the next round four years later, for sale to the highest bidder. These included

the aforementioned mines. The mines sold, and along with them various SOEs in shipbuilding,

iron works, cement manufacturing, and textiles.

But the mines held the most opportunity. Exploited for centuries by the shoguns, their output

had dwindled due to flooding and technical inability. Foreign experts invited into the

country suggested using steam-powered pumps to clear the flooding, explosives to reach

new areas, and vertical shafts. These measures successfully revitalized their output.

Out of the 21 biggest privatization sales, 11 were involved in mining in some way, including

the crown jewel Miike Coal Mine. The Miike sale in August 1888 yielded more than everything

else sold before it.

This injection of foreign technology unlocked a lot of previously hidden value. But it came

with a huge transfer of public assets into private hands, a move on par with the creation

of the Russian oligarchs in the 1990s.

The merchant families who took on these assets and benefitted from them would come to create

the Zaibatsu.

The Chinese characters standing for "zaibatsu" 財閥 literally mean "financial clan". The

same characters also originate the Korean word "chaebol". And the similarities are fitting.

While merchant trading houses existed before the Meiji Restoration, they did not exist

in a form recognizable to Western business and in general occupied a low social status.

The turbulent changes of the Meiji era presented once-in-a-century opportunities for families

with the right connections and gumption.

Who those families are and how they operated varied. You have top tier Zaibatsu like Mitsubishi

and Sumitomo, who date back to the Shogun days, and "second tier" Zaibatsu who emerged

after the Russo-Japanese War. Examples of those include Nissan, Furukawa, and Kawasaki.

Regardless, what these groups have largely in common is an extended family in control

of a holding company. These in turn control many subsidiary businesses run by non-familial,

professional managers. Zaibatsu assets are the family's communal property, and cannot

be used willy nilly by any single family member.

Their pathways to plutocracy are also quite similar. They acquired exclusive rights to

or outright purchased vast natural resources. Then milked these cash cows to fund future

expansions into the Japanese economy.

Take the example of the Mitsui family.

They had already done quite well for themselves as far back as the 1840s when records showed

them in possession of some 781,000 gold pieces. But in 1867, they saw the writing on the wall

and switched allegiances from the shogunate to the new Meiji government.

Mitsui helped raise funding for the new government's armies. That work then led them to help in

currency reform - collecting metals and exchanging the old currency for the new. Their success

in that then led to lucrative concessions for government financial services.

Their financial resources let them acquire several mines including the aforementioned

Miike coal mine, the foundation of their vast plutocratic wealth. The family then established

a variety of businesses as corporate vehicles for that wealth - foremost amongst them Mitsui

Bank, Mitsui Mining, and Mitsui Bussan, a general trading company.

Mitsui eventually spread its tentacles from there, becoming a mini-economy unto itself.

The Mitsui textiles businesses needed dyes so the family funneled profits from Mitsui

Mining to establish Mitsui Chemicals.

Mitsui Bussan needed ships to transport their wares to and from China, so they established

a shipbuilding subsidiary. Which in turn needed iron to build ships ... and so on.

Without government pushback to check their growth, these corporations soon came to dominate

the domestic economy. A Samsung before Samsung.

In the 1920s, the natural resource cash cows started to decline and the Zaibatsu families

looked for new sources of capital to fund their expansion plans. The stock market presented

the answer.

The families sold minority stakes in their subsidiaries to the public. Shareholders got

to own shares in these companies, but never had enough to actually have a real say in

things since the family always held the controlling blocks.

These moves unlocked large amounts of capital for the controlling families which then used

them to acquire even more revenue-generating assets like farmland and residential complexes.

Rents from these land assets combined with high-yielding financial assets generated incredible

passive income that fed the rich but burdened the poor. The wealth of the top 1% grew 3.5

times faster than the national average. These families became immensely wealthy at a time

when the average Japanese person had very little.

The government tolerated this wealth inequality situation because it benefitted their overarching

ideological goals. The zaibatsu helped drive the country's big industrial push - and later

on, its militarization as well.

Throughout the early 20th century, the Japanese nation embarked on a series of expansionist

drives pushed by war-hawking officers and widespread militarist ideology.

This included the creation of the puppet state of Manchukuo, the colonization of Korea, the

invasion of China, and so on.

The Zaibatsu helped provide the raw goods and material for this militarist push, reaping

massive government contracts. The ruling families should be overjoyed, but the expansionism

soon came to absorb them as well.

In the 1930s, a military government came to power in Japan after a series of assassinations

and acts of intimidation - though their thinking was not unpopular in society at the time.

The new government criticized the groups for their "short term focus" on profits and passed

new laws to de facto take control of their investment decisions. There is debate on how

and to what extent it exactly happened, but the end result is that the families lost control

of their companies on the eve of Japan’s entry into a worldwide war.

It would be an understatement to say that starting the Second Sino-Japanese War and

then aggressively pursuing World War II was foolish and brought heaps of misfortune onto

the nation. To maintain social stability and its grip on power, the Japanese government

passed substantial and radical reforms.

Throughout this period, the Zaibatsu families saw their wealth substantially reduced. War

damage crippled their companies’ most productive assets. The government started regulating

rents, wages, and land prices for its workers, reducing profits yet further. They also intervened

in the financial markets so to sell more war bonds, reducing the returns of the families’

financial assets.

And especially impactful was that, starting in 1938, the government confiscated and redistributed

agricultural land from landlords to tenant-farmers. The intention was to stimulate food production

for the war effort, but it was also accidental land reform. These land reform policies continued

after the war's end - carried on by the Occupation authorities.

In 1946, after the war’s end, the government instituted a tax on capital to pay off its

debt. The zaibatsu families saw their family taxable assets taxed at an 85% rate. One man,

Sumitomo Kichizaemon the head of the Sumitomo zaibatsu, lost 89% of his taxable assets.

This was a lot. But there still remained a lot of stocks held by the Zaibatsu holding

companies themselves that had not been included in the tax on family capital. There were concerns

about the sprawling nature of these companies. Thus in September 1946, Trust-busting economists

with fresh memories of the American Great Depression ordered the Zaibatsu to be "dissolved".

Ten Zaibatsu families were targeted in this policy, including some of the biggest. On

October 8th 1946, a group of commissioners from the Holding Company Liquidation Commission

or HCLC descended on the Mitsui and Mitsubishi offices in Tokyo.

They loaded 1.25 billion yen worth of stocks and bonds belonging to the Zaibatsu holding

companies into two trucks and drove them to a bank near HCLC headquarters. The other members

of the Big Four Zaibatsu - Yasuda and Sumitomo - would suffer the same.

Then in early 1947, the HCLC ordered top family executives as well as their close associates

to give up their positions in their companies. Nearly 2,000 executives in several hundred

businesses were removed from their jobs.

This seems like a lot but it soon became clear that the lists were hastily drawn. Six of

the 22 main Mitsui companies had been omitted, for instance. So in January 1948, the Occupation

ordered the Government to do a second purge.

56 family heads were identified in the directive. 309 of their relatives were removed from their

company positions. 2,798 additional high ranking company executives also had to resign from

their jobs.

To top it off, the HCLC also acquired these individuals’ personally held stocks and

bonds - estimated to be worth another 1.2 billion yen in 1948. Half of that was paid

to the government as part of the tax on capital. The rest went to the HCLC for future resale,

with compensation dispensed.

The American public - with urgings from China and learnings from the experience in Germany

- generally believed that the Zaibatsu families shared some responsibility for and profited

from Japanese aggression.

But the HCLC’s goal was to dissolve the "powerful octopus of monopolistic financial,

industrial, and commercial combines" - not really to dole out punishment. So despite

the flashy PR moves, the families came out of the HCLC's cleansing relatively alright

in the end. The commission and the Occupation treated them relatively fairly. This was no

Communist takeover.

For what it is worth, the Zaibatsu families certainly might have held some responsibility

for those wartime atrocities. But things were fuzzy and no paper trail existed. By and large

- justly or unjustly - they escaped larger punishment. You might say the same thing happened

with Germany’s industrialists too.

The families received cash compensation for the financial assets that the HCLC acquired.

The Mitsui families received 1.2 billion yen for all their shares, for instance. However,

proceeds were deposited into a national bank, and withdrawals were limited to prevent the

re-acquisition of controlling stakes at a later period.

A side effect of this action, by the way, was the broad democratization of Japanese

stocks. In 1946, one out of every four stocks had been owned by the Zaibatsu. By 1950, that

became one out of twenty.

Eventually, Japan’s richest families’ saw their wealth and income drastically reduced.

Land reform during and after the war had stolen away their rental income. The post-war tax

on capital had siphoned away four fifths of their taxable family assets. And the commission

forced them to sell some of their art to museums for millions of yen.

But most of all, what got them was hyperinflation. Remember, they were not allowed to withdraw

the proceeds of their sales until 1951. Triple digit annual inflation in those years caused

the real value of their cash holdings to plummet 97%.

So in the end, what the families had left coming out of this was more than comfortable,

but no longer plutocratic. By 1950, the top 1% highest earning Japanese earned half of

their income by - gasp - employment. Yes, they actually needed jobs.

In the end, the family plutocrats and their associates were sucked out of their companies

like meat out of an Alaskan King crab leg at a Boiling Crab restaurant in Southern California.

However, the Ruling Occupation stopped short of a total dismemberment of the companies

themselves.

There are a few reasons for this which are also interesting but we won't go into them

here. But the big thing - the truly big thing - was that the government bureaucracy - or

more specifically, the Ministry of International Trade and Industry or MITI - gained de facto

policy and guidance control over Japan's massive corporate apparatus.

This had long term effects almost as consequential as leveling out the country's wealth inequalities.

The families ran their company fiefdoms to grow their own wealth. This meant dominating

the domestic market, suppressing any competition, reaping monopoly profits, and staying out

of risky places like the export market.

Japan's economy could have turned out like Malaysia, Russia or the Philippines. But the

reset allowed MITI to push them onto a new path. A pro-export, industrialist one.

Now rather than carving up the domestic economy amongst themselves, Japan's companies focused

outwards. Their ranks filled with a new generation of professional managers, the nation's industries

pioneered the catch-up strategy that so many other East Asian tigers will later emulate:

Acquire and master foreign technology. Then use that newfound expertise to create products

that the rest of the world will want to buy.

This export discipline would go on to help create the Japanese economic miracle of the

50s and 60s. And it never would have happened had Japan not eaten their rich.