The relatively high capacity of the Japanese economy for adjustment to changed market conditions may thus be closely related to the industrial organization in Japan as characterised by group formation.
Now the keiretsu system is a nightmare for those desperate for Japan to reinvigorate its economy and help fend off a worldwide slowdown. The keiretsu ties that bind can also strangle: The culture of mutual protection makes it hard for strong companies to break free and grow, and forces weak companies to bail out even weaker ones.
Keiretsu ties showcase the Japanese penchant for meshing market and social relations in a “thick and complex skein,” as Caves and Uekusa (1976:59) put it, casting in high relief the Japanese economy's network embeddedness. Companies adjust terms of trade in accordance with their obligations and commitments to one another, factoring into price and contracting decisions nonmarket considerations such as fairness norms or the partner's well-being. Prices, wages, and rates of return are thus set, not so much according to what the market will bear, but rather to what seems just and proper given the identities of the actors and the needs of the community as a whole. Thus, transactions channeled through keiretsu networks distort the operation of market mechanisms, yielding patterns of resource allocation and return that appear deeply suboptimal through a conventional economic lens.