The secrets of the Shinkansen

The secrets of the Shinkansen

Why Japanese train companies own hospitals, baseball teams, and retirement homes

Japan is the land of the train. 28 percent of passenger kilometers in Japan are travelled by rail, more than anywhere else in the developed world. France achieves 10 percent, Germany 6.4 percent, and the United States just 0.25 percent. Travel in Japan is over a hundred times more likely to be by rail than travel in the United States.

Japan’s vast railway network is divided between dozens of companies, nearly all of them private. The largest of these, JR East, carries more passengers than the entire railway system of every country other than China and India. Each year, JR East carries four times as many passengers as the whole British railway system, even though it has fewer kilometers of track, serves about ten million fewer people, and competes with eight other companies. Japan’s railway system turns a large operating profit and receives far less public subsidy than European and American railways.

In most developed countries, the railways have struggled since the rise of the automobile in the 1950s. From this point on, North America saw the near-total replacement of passenger trains with cars and planes. In Europe, it meant vast government financial support to keep the lines open.

Japan’s different trajectory is often attributed to culture: the Japanese are conformists who are content to take public transport, unlike freedom-loving Americans who prefer to drive everywhere. Europeans are somewhere in between. Culture is also used to explain the incredible punctuality of Japanese railways.

These cultural explanations are wrong. The Japanese love cars, but they take trains because they have the best railway system in the world. And their system excels because of good public policy: business structure, land use rules, driving rules, superior models for privatization, and sound regulation have given Japan its outstanding railways.

This is good news for friends of rail. Culture is built over centuries, and replicating it is hard. But successful public policies can be emulated by one good government. Much about Japan’s railway system could be replicable around the world.

Japan’s railway companies

Today, the most striking institutional feature of Japanese rail is that it is privately owned by a throng of competing companies.

The railway arrived in Japan in 1872, during the Meiji Restoration, which opened the country up to foreign trade, ideas, and technologies. Like most Western countries, Japan nationalized its railways in the early twentieth century, creating what became known as Japanese National Railways (JNR). But it did not nationalize all of the lines, focusing only on mainline railways of national importance, and new private railways were still permitted.

Between 1907 and World War II, Japan saw a boom in new private electric railways, coinciding with rapid urbanization. Technologically, most of these private railways were similar to the famous interurbans in the United States: they were basically electric trams, but running between cities as well as within them. The American network eventually withered, and almost nothing of it survives today. In Japan, however, the network consolidated, and the light tramlines gradually evolved into heavy-rail intercity connections.

These companies are today known as ‘legacy private railways’ on account of their having been private since their inception. There are eight legacy private railways in the Tokyo metropolitan area, five in the Osaka–Kobe–Kyoto megalopolis, two in Nagoya, and one in the fourth city of Fukuoka. There are also dozens of smaller ones elsewhere. In the three largest urban areas, these operators account for nearly half of railway track and stations, as well as a plurality of ridership. The largest, Kintetsu, not only operates urban services, but a whole intercity network stretching from Osaka to Nagoya.

These companies often compete head-to-head. At its most extreme, three separate commuter lines compete for the traffic between Osaka and the port city of Kobe, running in parallel, sometimes fewer than 500 meters apart.

Meanwhile, the nationalized railways were managed by JNR. In the postwar era, JNR was responsible for building the famous Shinkansen system, as well as running commuter and long-distance lines throughout Japan. But in 1988, it was largely privatized, broken into six regional monopolies for passenger services together with a single national freight operator. These are collectively known as the Japan Railways Group (JR).

This means that Japan has ended up with six railway companies that trace their descent to the nationalized railways, the sixteen big legacy companies that have always been private, and a host of minor legacy railways, as well as numerous underground metros (some private, some municipally owned), monorails, and tram systems. This institutional diversity is striking enough. But equally striking is the consistent business model that has evolved amidst this pluralism: the railway that builds a city.

Railway-led urbanism

If I take a train to go for a solitary walk in the countryside, the railway company can capture some of the value it creates by charging me for the journey, just as other companies capture the value of the goods and services they provide by charging for them. However, if I take a train to visit family, clients, a theater, or a shop, an important difference appears. The railway can capture the value it creates for me by charging me a fare, but it cannot capture the value it creates for those at my destination. As transport infrastructure creates benefits that produce no revenue for providers, free markets rarely build enough of it.

Japan has partly solved this problem by enabling railway companies to do a great deal beside running railways. Take the example of the Tokyu corporation, one of the legacy private railways in southern Tokyo. You can not only travel on its trains, but also ride a Tokyu bus, live in a Tokyu-built house, work in a Tokyu office complex, see a doctor in a Tokyu hospital, buy groceries in a Tokyu supermarket, spend an afternoon at a Tokyu museum-theater-cinema complex, take your children to their amusement park, and even die in a Tokyu retirement home. The positive spillover effects of the railway on these things are captured by Tokyu because it owns them. The president of Tokyu has said:

I think that though we are a railway company, we consider ourselves a city-shaping company. In Europe for instance, railway companies simply connect cities through their terminals. That is a pretty normal way of operating in this industry, whereas what we do is completely different: we create cities and then, as a utility facility, we add the stations and the railways to connect them one with another.

This model was pioneered in the 1950s by what became Hankyu Railways. Hankyu’s network connects central Osaka to its northern suburbs, as well as Kyoto and Kobe. Its innovative founder Kobayashi Ichizo first built suburban housing, then a department store at the terminal station; he then created a hot spring resort, a zoo, and his own distinctive brand of all-women musical theater, the Takarazuka Revue. He also began to run bus services to and from his stations. Other companies emulated Hankyu’s example: Tokyo Disneyland is a collaboration between Disney and the Keisei Railway, while Hanshin in Osaka owns the Hanshin Tigers baseball team.

Core rail operations are profitable for every Japanese private railway company, but they usually only account for a plurality or a small majority of revenue. The rest is contributed by their portfolio of side businesses. There is a natural financial synergy between the reliable but unremarkable cash flow of the railway and the higher-margin potential of real estate and services.