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2 Japan Railway & Transport Review • January 1997

Railway Diversification

Features

Copyright © 1997 EJRCF. All rights reserved.

Japanese Private Railway Companiesand Their Business Diversification

Takahiko Saito

Basic Characteristics of MajorRailway Company Groups

In Japan, as in many of the other indus-trialized countries, automobiles play theprincipal role in passenger transport, ac-counting for almost 50% of passenger-km in 1994 (unless noted otherwise, allstatistics are for 1994). However, themost salient characteristic of traffic inJapan is probably that railways are thesecond most important means of passen-ger transport, contributing to 33.4% ofpassenger-km. In fact, railways in Japan,including the shinkansen in intercitytransport and the express commuter trainsin big cities, play a vitally important rolein the passenger traffic market.As is widely known, the Japanese Nation-al Railways (JNR) was privatized in 1987into seven Japan Railways Companies(JRs)—six passenger companies and onefreight company. This imparted a uniquecharacter to the structure of Japan’s rail-way industry. Although the seven com-panies are still new, their managementand businesses have been privatized tosuch an extent that it is difficult to findany vestige of the former JNR in them.Furthermore, it is the private railwaycompanies, especially the 15 major onesaccounting for 94% of total passenger-km of private railways, that serve as theother locomotive of the Japanese railwayindustry.Japanese private railway companies,which operate with no government sub-sidy, offered services at lower costs thandid the former JNR, especially in largecities. Because of their efficient manage-ment, they won high social recognitionand their success had a significant effecton the government plan to privatize JNR,by helping reduce much of the uncertain-ty and hesitation in deciding to privatize.The practice of JR management follow-ing the example of private railway com-panies has proved very successful. Sinceprivatization, the huge annual loss in the

JNR days has returned to the black.It could be said that the profitable opera-tion of the JRs and private railway compa-nies in large cities is a unique phenomenonnot found elsewhere.The Japanese passenger railway businessis conducted mainly by three groups—JR, private railway companies, and pub-lic railway companies. The JR groupmanages the nationwide network of rail-ways that belonged to JNR. Private rail-way companies operate regional railwaysand twelve public railway companies op-erate subways and/or trams. Of the nineJapanese cities with subways, only To-kyo has two bodies operating subways:the Toei Subway run by the municipalgovernment, and the Eidan Subway,which is run by the Teito Rapid TransitAuthority, a publicly-owned independentcorporation. The underground railwaysoperated by JRs or private railway com-panies in urban areas are not called sub-ways so they are treated separately fromsubways in the statistics. Incidentally, theGovernment has already decided toprivatize the Teito Rapid Transit Authori-ty which now operates 162 km of sub-way lines, or 70% of the total subwaysin Tokyo.There are 149 private railway companies,135 of which are engaged in passengertransport. Of these 135, 15 are majorcompanies. The total length of line op-erated by the 15 majors is 2,860 km, or amere14% of the total length of line—20,580 km—operated by the six JRs.Nevertheless, the number of passengerscarried by the 15 majors is equivalent to89% of the total number of passengerstransported by the six JRs, and their pas-senger-km reaches 45% of those of thesix JRs. In Tokyo, Osaka, and Nagoya, inparticular, the 15 majors carry far morepassengers than the JRs (60% vs. 40%),showing that the principal field of activ-ity of the major private railway compa-nies is big cities.When it comes to railway operations in

large cities, even JNR, let alone the ma-jor private railway companies, was in theblack. The fact that railway companiesengaged in commuter transport in largecities could maintain sound managementwithout government subsidy is remark-able to managers of railway companiesin other countries. The traffic market inlarge Japanese cities is extremely favour-able to railway management. For exam-ple, the population within a 50-km radiusof Tokyo is 29,570,000, for Osaka,16,050,000, and for Nagoya, 8,530,000(in 1995). Tokyo and Osaka are dense-ly-populated metropolises, and mostcommuters to the city centres are cap-tives of railways. Most of the major pri-vate railway companies have an averagetraffic density (number of persons in tran-sit per day–km) of more than 100,000.For six companies, the average trafficdensity exceeds 200,000. High-densitymarkets like these favour any railwaycompany. On the other hand, these den-sities indicate the congestion on trains inTokyo and Osaka. As a matter of fact,the infamous overcrowded passengertransport on an extremely tight schedulesupports the profits of urban railways inJapan.As a rule, individual private railway com-panies in large cities hold a monopoly intheir territory. However, due to the cir-cumstances leading to the formation ofthe present railway network (most JR lo-cal lines were originally intercity lines),there are cases where a JR and one ortwo private railway companies maintainlines in the same area and compete interms of fares and passengers. In partic-ular, in the Osaka-Kyoto and Osaka-Kobeareas where JR Central and two privaterailway companies compete, they arevery active in setting competitive faresand improving speed and comfort.Despite such competitive relationships,in terms of joint operation of trains, thereare cooperative or supplementary rela-tions between urban railway companies

3Japan Railway & Transport Review • January 1997Copyright © 1997 EJRCF. All rights reserved.

irrespective of differences in managementmode. This is a characteristic of urbanrailway traffic in Japan. For example, inTokyo, joint train operations have alreadybeen implemented between local JR linesor private railway companies and sub-way lines. Eight of the major private rail-way companies have such operationswith subways. Similar operations havealso been implemented in Osaka,Nagoya, Kobe, Kyoto, and Fukuoka.As described above, the three factors sup-porting sound management of privaterailway companies are: (1) efficient man-agement, (2) large, high-density market,and (3) overcrowding during rush hours.However, I would like to propose a fourthfactor: business diversification at privaterailway companies. The following sec-tions discuss the characteristics of Japan’sprivate railway industry with focus on thisfourth factor.

Private Railway CompaniesAs Developers

The major private railway companies canno longer be viewed as mere railway ortransportation businesses. Today, theyare more like urban developers or localservice businesses supporting the lives ofpeople living along the railway line.Probably, the JRs and private railway

companies differ most in this respect. Themajor private railway companies havemany years of experience in business di-versification and community develop-ment along their lines. In this respect,the JRs are far behind the major privaterailway companies because the formerJNR was prevented by law from diversi-fying its business or forming a group.Imagine living near a private railway linein a large city, particularly a residentialtown developed by the railway company.Not only will you be using the railway butthe buses, taxis operated by the railwaycompany and also the shopping and rec-reational facilities owned by the railwayaffiliates. Life in a town developed by aprivate railway company is sometimescalled ironically ‘cradle-to-grave securi-ty’. However, any town developed by aprivate railway company is associated inthe minds of many people with a com-fortable life in a space developed andmaintained in a planned manner.Many existing lines of the major privaterailway companies were constructedfrom the very beginning as electric rail-ways for transportation in large cities.The Japanese railway network has ex-panded through several constructionbooms with intervening nationalizationof railways; for example, the first rail-way boom (for 7 to 8 years from 1885),

the second railway boom (1896–1898),the nationalization of railways (1906–1907), the light railway boom (1911–1915), the electric railway boom (around1910 in Osaka and 1920s in Tokyo), andso on. In 1905, immediately before thenationalization of railways, the total tracklength of private railways was more thandouble that of the government railways(5,231 vs. 2,562 km). In those days, pri-vate railways were mostly intercity lines.As political and military demands for anationwide railway network strength-ened, the government took over 17 pri-vate railways (4,527 km) and mergedthem into the government railways in1906–1907.After this nationalization, establishmentof new private railways was permittedonly when they were to be engaged inlocal transport not interfering with JNRoperations. As a result, in the field ofrural transport, light steam railways wereconstructed around the country. In largecities, including Tokyo and Osaka, anelectric railway boom occurred, givingrise to a succession of local private rail-way companies. The current network ofthe major private railway companies con-sists mainly of rapid urban railways (1)constructed as electric railways, (2) builtoriginally as steam railways and laterelectrified, and (3) constructed as elec-

Tobu Bus Serving New Station and Housing Development (EJRCF) Tobu’s Housing Development near New Station (EJRCF)




tric trams. The private railway compa-nies promoted business diversificationfrom the time they constructed their lines.Since there was strong tendency to readi-ly permit private railway companies inareas with no railway lines, in order tosurvive, the newly-established compa-nies had to increase the population neartheir lines and attract as many passen-gers as possible by creating entertainmentnear their lines. This practice created astereotype for business diversification ofprivate railway companies.The pioneer was Hanshin which con-nected Osaka and Kobe by large-scaletram in 1905. To attract passengers, thecompany developed residential areas andrecreational facilities (spas, mountain-climbing sites, and playgrounds) alongthe line. In addition, it started lettinghouses and building department stores atterminals. Within 10 years after its foun-dation, the company became widelyknown for its business diversification.Hankyu emulated Hanshin and aggres-sively diversified its business. It laid anelectric railway line between Osaka andTakarazuka and had to develop urbancommunities and recreational facilitiesalong the line in order to remain in busi-ness because the area along the line wasstill undeveloped. Foreseeing financialdifficulties after opening the Osaka-Takarazuka line, the company presidenttook the lead in distributing a pamphletto Osaka citizens describing the pleasuresof living on the line. After the company

succeeded in developing residential ar-eas, it set about developing recreationalfacilities along the line and departmentstores and hotels at terminals. While fail-ing occasionally, success was steady. Asurban developments along the line ex-panded, the huge high-quality residen-tial town came to be known as the‘Hankyu Plain’. The management prac-tice adopted by Hanshin and Hankyustrongly influenced the management ofprivate railway companies in Tokyo in the1920s when a real private railway boomoccurred.When it comes to business diversifica-tion, the Tokyu railway network (about100 km) in the western suburbs of Tokyois now the leader in the Japanese privaterailway industry. The company formedthe Tokyu group—Japan’s largest privaterailway company group with about 400affiliated companies and more than100,000 employees. The predecessor ofTokyu was a real-estate company whichdeveloped a high-class residential areain the Tokyo suburbs. Tokyu entered therailway business by founding a railwaycompany to build and run a line linkingthe residential area to downtown Tokyo.It is a rare example where a real estatebusiness preceded the railway business.However, the company is a good exam-ple of the mode of private railway man-agement in Japan in which railwaymanagement and property developmentnear the line go hand-in-hand.The same strategy has been used in a re-

cent large-scale Tokyu development. Thecompany constructed the Den-en-toshiLine with a length of 20.1 km (15 sta-tions) in the southwestern suburbs of To-kyo between 1963 and 1984. At thesame time, it developed Tama Den-en-toshi (Tama Garden City) with an area ofabout 5,000 ha by levelling a huge hillalong the line. The population of the newtown is now almost 500,000. The Den-en-toshi Line was eventually linked to the9.4-km Shin Tamagawa Line (an under-ground railway line closer to central To-kyo) that Tokyu opened in 1977. Aconnection with the Tokyo Rapid TransitAuthority subway line enables Tokyutrains to run into central Tokyo.The above business strategy by Tokyu isof an unusually large scale. Similarsmaller-scale examples can be found al-most everywhere along the lines of themajor private railway companies. Inmany cases, community building by pri-vate railway companies accompanies de-velopment of residential and commercialareas, improvement of public access tothe stations, and construction of neigh-borhood amenities. Some companieseven invite in campuses of well-knownuniversities to improve the town’s image.Generally speaking, these railway townsare well-maintained in a planned man-ner and offer affordable housing lots andhigh-quality houses. Private railwaycompanies receive high social recogni-tion as developers because of this.Urban redevelopment near private rail-

Tama Den-en-toshi near Fujigaoka in 1966 (K. Sekita) The Same Place 30 Years Later (EJRCF)


way terminals and famous sightseeingspots near big cities also offer good op-portunities to private railway companies.The large commercial districts locatedalong the JR East Yamanote Line in To-kyo and those in Osaka were originallybusiness quarters formed near privaterailway terminals. More than a few pri-vate railway terminals share the samebuilding with department stores, hotels,restaurants, etc. Private railway compa-nies also have strong influence in themanagement of commercial and officebuildings and theatres near their termi-nals. The area near the Hankyu Osaka(Umeda) terminal, where there are manyHankyu-owned buildings, is called‘Hankyu Village’. Development of rec-reational facilities by big private railwaycompanies at famous sightseeing spotshas a long history, and the competition

in resort development between privaterailway companies is so fierce that it be-came the subject of a novel, Hakone-yama, describing the fierce competitionbetween the Odakyu and Seibu groupsin developing resort business at MtHakone, about 60 km south of Tokyo.However, unlike private housing develop-ment, there are quite large differences inthe eagerness of different private railwaycompanies to redevelop areas around ter-minals and to develop holiday areas.

Diversification throughDevelopment of Side Businessesand Business Group Formation

When discussing business diversificationof private railway companies, it is nec-essary to distinguish between the busi-ness diversification at the company itself,

and the business diversification imple-mented by formation of a business group.The business diversification of individu-al urban railway companies has much incommon, although details may differ. Bycontrast, business diversification by for-mation of a group, differs greatly from onecompany to another. For example, Sei-bu Railway’s distribution group and Han-kyu’s Toho group are very independentof their parent company, although theyuse the parent company name. Thus, ir-respective of past circumstances, someprivate railway company groups canhardly be regarded as such. Some groupsdeploy delocalized businesses havingnothing to do with the business territoryof their parent railway company.Table 1 shows that the most popular sidebusinesses of private railway companiesare bus operations and real estate busi-

Line Length Passenger-km Railway Revenues Bus Revenues Other Revenues Total OperatingCompany (km) (million) in ¥ billion (%) in ¥ billion (%) in ¥ billion (%) Revenues

in ¥ billion[Tokyo area]

Tobu *464.1 14,366 141.6 (59) 35.4 (15) 63.3 (26) 240.3Seibu *179.8 9,489 87.3 (39) – (–) 138.3 (61) 225.6Keisei 91.5 3,860 51.3 (59) 26.9 (31) 8.1 (9) 86.3Keio 84.8 6,936 69.4 (59) 21.3 (18) 26.6 (23) 117.3Odakyu 121.6 10,983 95.6 (63) 0.7 (0.5) 56.4 (37) 152.7Tokyu 100.7 8,759 105.5 (40) – (–) 159.4 (60) 264.9Keikyu 83.8 6,275 61.5 (46) 23.9 (18) 47.0 (35) 132.4Sotetsu *35.0 2,823 28.2 (21) 8.9 (7) 94.5 (72) 131.7

[Osaka area]Kintetsu 594.2 15,252 189.3 (74) 10.2 (4) 54.6 (22) 254.1Nankai 172.3 5,036 65.7 (56) 12.3 (11) 38.6 (33) 116.6Keihan 91.9 5,319 60.1 (57) – (–) 45.3 (43) 105.4Hankyu 146.2 10,339 103.6 (58) – (–) 73.7 (42) 177.3Hanshin 45.1 2,187 28.9 (41) 5.4 (8) 36.5 (52) 70.8

[Nagoya/[Fukuoka areas]Meitetsu 539.3 7,313 81.9 (55) 22.3 (15) 45.1 (30) 149.3Nishitetsu 121.1 2,089 25.4 (17) 75.3 (51) 47.8 (32) 148.5

[Reference]JR East 7,502.0 128,144 1,872.3 (96) – (–) 82.1 (4) 1,954.4JR Central 1,983.5 49,508 1,119.0 (92) – (–) 96.3 (8) 1,215.3JR West 5,070.1 55,484 855.4 (98) – (–) 18.6 (2) 874.0TRTA 162.2 15,881 261.1 (98) – (–) 4.2 (2) 265.3

* Including freight linesSource: Yearbooks of individual private railway companies

Table 1 Major Private Railway Company Statistics and Operating Revenues (fiscal 1994)




nesses. The typical private railway com-pany has three business departments:railway, bus, and real estate. Of the 15major private railway companies, Tokyu,Seibu, Keihan, and Hankyu each have asubsidiary engaged in the bus business,so they do not have a bus department.(At Odakyu, the bulk of the bus businessis entrusted to a subsidiary.) All the 15major companies are involved in threetypes of bus operations (normal bus ser-vices, rapid intercity buses, and bus rentalservices). Some offer these services them-selves, and others entrust them to sub-sidiaries. The same applies to the realestate business. Most major private rail-way companies allot some part of theirreal estate business to subsidiary com-panies. Therefore, it is not very mean-ingful to compare side businessesbetween private railway companies.However, to show the general trend, Ta-bles 1 and 2 indicate revenues and earn-ings by department; at some companiesincluding Tobu, Keisei, Keio, Keikyu, Kin-tetsu, Meitetsu, and Nishitetsu, the oper-ating revenues of the railway or trafficdepartment (railway and bus) are muchlarger than those of the development de-partment, etc., whereas at other compa-nies, the reverse is true. The formercompanies have a strong image of rail-way companies with modest business di-versification. This is especially true ofKeisei (90% of operating revenues fromrailway business), Kintetsu, Keio, Tobu,and Meitetsu. Kintetsu, Meitetsu, andTobu have relatively long lines (594 km,539 km, and 463 km, respectively). Nish-itetsu, based in the Fukuoka area is aunique case. It is Japan’s largest bus com-pany, as well as a major private railwaycompany, and the revenues from bus ser-vices account for about 50% of the total.By contrast, the proportion of revenuefrom the railway business is relatively lowat Sotetsu, Seibu, Tokyu, and Hanshin.Sotetsu, which only became a major pri-vate railway company in 1989, is en-

gaged mainly in the real estate business.In the railway business, it only runs a 35-km commuter line. Seibu with 175 kmof lines has focused on the tourist indus-try in recent years and the revenues fromthis business account for 70% of the to-tal from side businesses. Recently, therevenues from its tourist business exceed-ed revenue from its railway business.Seibu’s tourist business comprises 23types, including amusement parks andsports. Since many sites are located in

the suburbs of Tokyo, they attract passen-gers.Tokyu is well known for its efficient rail-way management and aggressive, stablereal estate management. It is highly eval-uated as Japan’s leading private railwaycompany. The company has four depart-ments: railways, real estate, hotels, andothers. The railway and real estate de-partments account for the bulk of oper-ating revenues and earnings (railways49%, real estate 33%, hotels 2%, others

Table 2 Operating Profits and Loss of Major Private Railway Companies

Railway Bus Other OperatingCompany in ¥ billion (%) in ¥ billion (%) in ¥ billion (%) Profit

in ¥ billion

Tobu 15.00 (44) -2.12 (-6) 21.49 (63) 34.37Seibu 14.31 (52) – (–) 13.02 (48) 27.33Keisei 8.45 (87) -0.35 (-4) 1.62 (17) 9.72Keio 11.03 (58) -0.25 (1) 7.58 (40) 18.86Odakyu 14.02 (51) 0.16(-0.6) 13.44 (49) 27.30Tokyu 20.39 (49) – (–) 21.52 (51) 41.91Keikyu 9.78 (55) -0.66 (-4) 8.56 (48) 17.68Sotetsu 4.54 (28) -1.06 (-6) 12.50 (78) 15.98

Kintetsu 16.04 (51) -1.43 (-5) 16.63 (53) 31.24Nankai 8.08 (44) -1.25 (-7) 11.50 (63) 18.33Keihan 6.64 (49) – (–) 7.02 (51) 13.66Hankyu 8.73 (42) – (–) 11.97 (58) 20.70Hanshin 2.76 (23) 0.13 (1) 9.38 (76) 12.28

Meitetsu 7.24 (43) -1.24 (-7) 10.98 (65) 16.98Nishitetsu* 2.43 (25) 0.77 (8) 6.36 (67) 9.55

* Figures for Nishitetsu are for fiscal 1995.Source: Yearbooks of individual private railway companies

Affiliated Total Total Employees ofCompany companies capital annual sales Employees parent

(¥ billion) (¥ billion) companyTobu 79 91.8 1,016.9 27,845 10,858Keisei 139 75.8 521.4 21,204 4,706Keio 40 63.1 513.4 16,000+ 4,452Odakyu 105 86.8 961.0 30,607 4,187Tokyu 400 443.6 4,783.3 107,266 5,087Keikyu 69 43.1 315.4 14,880 5,585Sotetsu 38 64.6 377.4 6,750 2,430Kintetsu 152 205.0 3,240.7 74,912 12,458Meitetsu 294 173.0 1,560.9 59,677 8,277

Only groups from which all five data items were obtained are shown. + Approximate figureSource: Yearbooks of individual private railway companies

Table 3 Profile of Nine Major Private Railway Company Groups (fiscal 1994)


16%).Odakyu, Hankyu, and Keihan fall be-tween the above two groups. With thebus business (of subsidiary) added to theirside business, they approach the formergroup. However, it should be noted thatin terms of revenue from side business-es, Hankyu is the No. 1 private railwaycompany outside the Tokyo area. Table1 also shows the figures for the three JRsin Honshu and the Tokyo Rapid TransitAuthority. Although the proportion ofrevenue from side businesses at the threeJRs is considerably smaller than at pri-vate railway companies, the absoluteamount is not much smaller than that atany private railway company.Table 2 shows the earnings by departmentat the 15 major private railway compa-nies. Although detailed explanation isomitted here, it can be understood thatthe proportions of earnings from otherdepartments are generally high (com-pared with figures in Table 1), that thecompanies depend on the real estatebusiness for profits, and that the bus busi-

ness is generally in tight financial condi-tions.Looking at the group formation by com-pany, very different results are obtained.At Kintetsu and Meitetsu, the head officesfocus on the railway business, but are ac-

tive in large-scale business diversificationby formation of a group. The Kintetsugroup, in particular, has emerged as Ja-pan’s No. 2 private railway companygroup, second only to the Tokyu group.The Tokyu group is huge with about 400member companies and 100,000 em-ployees; annual sales total ¥4,783 billion.It includes 10 firms listed in the first sec-tion of the Tokyo Stock Exchange. TheKintetsu group has 152 members and al-most 75,000 employees with annual salesamounting to ¥3,240 billion; seven com-panies are Stock-Exchange listed. Interms of the operating revenues at headoffice too, Tokyu and Kintetsu hold theNo. 1 and No. 2 positions, respectively.At Tokyu, the revenues at the head officeaccount for just 5.5% of the total operat-ing revenues of the group, and the reve-nues from its railway business accountfor only 2.2% of the total group operat-ing revenues. At Kintetsu too, the situa-tion is roughly the same (7.8% and 5.8%),respectively. These figures show the sizeof the two groups (Table 3). Other famous private railway companygroups include the Meitetsu group (294member companies; 60,000 employees;

Railway Business Diversification with JR Hotel and Office/Shopping Complex, and Seibu and Tobu DepartmentStores near Ikebukuro station (Tokyo) (JR East)

Tobu World Square Theme Park near Kinugawa, 100 km North of Tokyo (Tobu Railways)




¥1,600 billion annual sales), the Hankyugroup (No. 4 in total capital; four com-panies listed on stock exchange), theTobu group and Odakyu group (each reg-istering annual sales amounting to some¥1,000 billion).Looking at the contents of business di-versification by group formation, the 15major private railway companies sharethe following types of business: bus andtaxi operations along their lines; distri-bution (department stores and supermar-kets); real estate (housing and buildingleasing); construction (land development,etc.); tourism and recreation; hotels; trav-el agency; culture, etc. The fact that theabove businesses supporting communi-ty life along the lines are included in all15 groups indicates the origin of thegroup formation. In recent years, infor-mation-related businesses, includingCATV and information networking, areincreasing.Interesting examples are ownership of aprofessional baseball team (Seibu, Han-shin), television broadcasting (Hankyu),city gas (Tobu), and college management(Tokyu).Some large-scale private railway compa-ny groups show a marked tendency to-wards delocalization. For example, theyinclude railway companies operating inremote sightseeing areas and bus com-

panies operating in local cities, or con-struction of department stores, hotels, andrecreational facilities in various parts ofthe country and even overseas. In termsof bus traffic, the Tokyu, Kintetsu, andMeitetsu groups each have territorythroughout the country. In the real es-tate and tourist industries, still more com-panies are in businesses having nothingto do with their main line of business.As examples symbolizing these activitiesthere are the fierce competition betweenprivate railway companies in manage-ment of ski slopes, theme parks, and otherresorts; Tokyu’s hotels and recreationalfacilities in Japan and also in the USA,Europe, Southeast Asia, and Oceania;entry into international businesses, in-cluding regular airplane flight services(Tokyu) and manufacturing of rollingstock (Tokyu, Kintetsu, and Hankyu).Delocalization alone does not indicatethe aggressiveness of business diversifi-cation. For example, the Kintetsu groupis the most active in diversification. How-ever, in diversifying, the group gives toppriority to areas along its railway lines.Deploying a new business at a place farfrom the lines involves high risk. In fact,some private railway companies havebecome cautious about business diversi-fication after learning from past failures.

Social Evaluation ofBusiness Diversification

The essence of railway managementpracticed by Japanese private railwaycompanies is that genuinely privaterailway companies have played an im-portant role in the social field of trans-portation without government subsidy;their successful urban development ac-tivity along their railway lines hashelped support their main business. Theabove method of railway managementhas something in common with the ‘de-veloper proposition’ (optimum behavierfor developers) in economic theory. If arailway company carries out railway im-provement and urban development si-multaneously, the deficits from railwayoperations under optimum fares (equalto marginal costs) can be covered by therevenues from land (internalization ofprofits from development).In other countries, business diversifica-tion at monopolistic railway companieshas often been subject to strict regula-tion and companies were susceptible topublic ownership. As a result, the meth-od of railway management practiced byJapanese private railway companies isfound only in exceptional cases as in thehistory of the Metropolitan Railways inLondon. Private railway companies inJapan were lucky that after nationaliza-tion in 1906, only private companiesengaging in local transport were permit-ted, and that regulations were seldomenforced because of the fragile manage-ment foundation. It was also fortunatefor the railway companies that althoughpublic ownership of urban transport wasoften suggested, it was not put into ef-fect. Nevertheless, the present soundmanagement could not have beenachieved without a favourable market.The most fortunate aspect is the concen-tration of population and industry in largecities.Although there is always a gap between

Kintetsu Tourist Bus in Hawaii (Kinki-Nippon Tourist)


Takahiko Saito

Takahiko Saito is a Professor at Kinki University where he has taught since 1971. He was Visiting

Scholar at Erasmus University, the Netherlands, in 1994–1995, and was appointed Vice-Chair-

man of The Japan Society of Transportation Economics in 1995.

economic theory and actual economicphenomena, the history of the transportand community development activities ofJapanese major private railway compa-nies matches the above developer prop-osition quite well. Their aggressivemanagement based on railway transportand community development was some-times criticized as giving priority to prof-its rather than public good. However,after 1970, as the financial difficulties ofJNR and publicly-managed railwaysworsened, the efficient and economical-ly rational management of private rail-way companies gradually received highrecognition. Today, even the success ofthe JR privatization is evaluated on thebasis of its approach to business diversi-fication.If we are to evaluate private railway com-panies’ diversification by the communitydevelopment activities along their lines,the following two viewpoints can betaken.One is that community development hasoffered convenient, high-quality urbanlife to the people living near the railwaylines. Neither the former JNR nor publicrailways have undertaken any coordi-nated activity in urban transport andcommunity development, and such co-ordination is also impossible for a hous-ing developer. Private railway companieshave clearly recognized and exploitedtheir advantage in this field.Needless to say, for railways runningthrough built-up areas, development sitesare hard to secure and the investment riskis high because it is uncertain whetherthe profits from the development will belarge enough to cover the costs. This iswhy many urban redevelopment projectsin towns or cities are entrusted to publicentities. In fact, urban developmentprojects by private railway companieswere mostly concentrated in low-riskfields, such as development of large com-mercial areas near terminals.The second viewpoint is that the urban

development activity of private railwaycompanies has helped them to maintainstable profitability. According to the de-veloper proposition mentioned above, ifa railway company is also to act as a land-owner for housing along the line, with-out fare regulation, the company shouldset the train fares at an inexpensive butoptimal level. However, this conditionis not met in Japan where railway faresare set (with government approval) tomaintain profitability. Needless to say,we cannot expect conformity of realitywith pure theory. Even so, we shouldnote that in the case of Japanese urbanrailways, overcrowding has played afavourable role. Regardless of whetheror not it is good traffic policy, congestedurban railways have enabled fares to bekept low. Since overcrowding has sup-ported sound management, the success-ful community development may havebeen supported by it too.Private railway companies have strivedto increase passengers by developinglarge residential areas along their lines,building shopping centres, expandingbusiness quarters near railway terminals,creating recreational facilities and sportsfacilities, inviting in universities, etc.With the exception of local private rail-way companies engaged in unprofitablerailway transport, Japanese private rail-way companies have not as a rule beengranted government subsidies for capitalor management expenses. Although low-interest funds are available from govern-ment banks, the Japanese private railwayindustry has been strictly self-supporting.

Despite the terrible congestion duringrush hours, the trains and stations of pri-vate railway companies are clean and in-dividualistic. Furthermore, in big citieslike Tokyo and Osaka, their fares are low-er than those of the JRs. (In the JNR days,the fare gap was even wider.) The highsocial standing of the private railway in-dustry can be traced to the fact that theyhave continued to offer passenger servic-es at lower fares than those of the formerJNR without public financial aid.The successful management of privaterailway companies has not only broughtbetter passenger service at lower cost buthas also helped prevent unplanned de-velopment along the railway lines. Fur-thermore, it has saved public funds.Nevertheless, the ability of private rail-way companies should not be overesti-mated; their success is backed by a hugemarket and, more importantly, over-crowded passenger transport. Conse-quently, success may not be automaticeven if their expertise is introduced intoa foreign railway company. �

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