The Konoike Family Tree

Shinroku Yamanaka (known later as Shin’emon), who is credited with establishing Konoike as a merchant family, was born in 1570 (Genki 1) in an era preceding the Edo period. He began transporting sake to Edo (the so-called "Edo Zumi" business) following his success in sake brewing around 1598–1600 (Keicho 3–5). After the establishment of the Edo Shogunate, Shinroku opened an Osaka store engaged in sake brewing and sales in 1619 (Genna 5).

Then in 1625 he started a water transportation business. A prominent figure in such shipping was Masashige, the eighth son of Shinroku, born in 1608. When Shinroku died in 1651 (Keian 3), Masashige inherited his father’s Osaka store and assumed the name Zen’emon Konoike. Zen’emon’s family, called the “Imabashi Konoike” as opposed to the original “Itami Konoike” branch, became the most prosperous among the Konoikes. Masashige died in 1693 (Genroku 6).

Yukimune (1643–96, Kan’ei 20—Genroku 9), who succeeded Masanari as the second head of the Imabashi Konoike family, assumed the name Kiemon. From the time of Yukimune, the Konoike familyFootnote 1 began to focus on financial services, starting with the establishment of a money exchange business in 1656 (Meireki 2). In 1670 (Kanbun 10), during the time of the second-generation family head Yukimune, the Konoike family introduced the “financial statement” as a commercial accounting book with a double entry structure.

Munetoshi (1667–1736, Kanbun 7—Genbun 1), the third head of the Imabashi Konoike family, assumed the name Zen’emon, with successive heads of the Konoike family also taking on that name. By the end of the Edo period, the name Zen’emon had been passed down for ten generations.Footnote 2 In this case study highlighting their innovative business practices, all the successive family heads will be collectively called “Zen’emon Konoike,” including the family’s founder Shinroku Yamanaka, as well as the second patriarch Yukimune.

Munetoshi, the third Zen’emon Konoike, completed new land development projects (Konoike Shinden) in 1707 (Hoei 4) and established the “Iesadame Kiroku Oboe” in 1723 (Hoei 4) that would serve as the Konoike family’s long-lasting constitution. The family precepts established under Munetoshi's reign prevented the dispersion of the Konoike family's wealth. Business-wise, Munetoshi stopped sake brewing and shifted mainly to lending to feudal lords (Daimyo lending).

The Konoike family’s business continued even after the Meiji Restoration. However, the Konoike family never became a zaibatsu, in contrast to the Mitsui and Sumitomo families that were part of “the Big Three merchant families” of the Edo period, and evolved into zaibatsu during the Meiji period.

Development of Clear Sake and Its Shipment to Edo

The first in a series of business innovations by the Konoike family was the development of clear sake [Seishu]. It is said that the clear sake we know today, different from the traditional cloudy sake, was created at the end of the Middle Ages. Thus, the Konoike family did not truly invent clear sake. It is also assumed that others were already engaged in the so-called “Edo Zumi,” or transportation of sake to Edo. Matao Miyamoto asked the following question and then provided his answer: “Why is Konoike still regarded as the founder of sake brewing and Edo Zumi in various studies?”Footnote 3 Miyamoto then proposes an answer: “Konoike’s sake, based on advanced technology, gained a higher reputation than his competitors’ products, perhaps the reason why Konoike was talked about as an innovator in this industry.”Footnote 4

Miyamoto describes the “new business” launched by the Konoike family—the shipment of clear sake to Edo—as follows:

1) At first, they used a two-to vat [one "to" is about 18 liters], but when they saw strong demand they replaced it with a four-to camphor vat, and counting a pair of vats on a horse as a single horse load they regularly made dozens of such shipments to Edo by land; 2) The shipments were sold directly to the daimyo estates; 3) According to the first single shipment of 4 to, the cost for one round trip to Edo was 350-360 mon, with sales at 8 kan mon. Thus, the gross profit margin was an astonishingly high 7 kan 650 mon to 7 kan 640 monFootnote 5… . The profit Konoike made from the Edo Zumi business can be characterized as the founder's profit – one deriving from two innovative practices: selling a new product, in a newly cultivated market.Footnote 6

The Beginning of [Konoike’s] Water Transport Business

As the scale of sake shipment to Edo increased, the Konoike family switched the transportation method from land to sea, thus initiating its water transport business. At that time in 1625 (Kan’ei 2), “Shinroku was 56 years old and Masanari was eighteen years old.”Footnote 7 The Konoike family’s innovation, beginning with the development of a new product (clear sake), led to the innovation in logistics (its foray into the water transport business) following the cultivation of the new market (Edo Zumi or clear sake shipment to Edo). This was indeed a “chain of innovations.”

Miyamoto wrote of the first Zen’emon Konoike, Masashige, who focused on the shipping business: “With more than 100 man-powered boats, he reportedly transported his own sake and general cargo, especially rice consignment from feudal lords in the western part of the country,”Footnote 8 adding: “However, it seems that the shipping business never became the main business of the Konoike family.”Footnote 9

Expansion into Financing and Lending to Daimyo

The Konoike family’s main business following the second generation Zen’emon Konoike, Yukimune, was financial—starting a money exchange business in 1656 (Meireki 2). At that time, “first-generation Masashige was 48 years old, and second-generation Yukimune was 14 years old.”Footnote 10

Miyamoto explains how the Konoike family shifted to the financial business relative to the general trend of wholesalers at the time:

In the early days, Konoike's commodity trading was, so to speak, "yorozu-ya" style, handling many types of products. This broad range of products handled by Konoike can be attributed to the fact that the family entered the commodity trade with a variety of opportunities, including sake brewing, sales of sake to Edo, and the shipping business. This "yorozu-ya" style of business was a common characteristic of wholesalers in the first half of the 17th century. In contrast, many of the wholesalers that emerged from the latter half of the 17th century were specialized wholesalers. Unlike the early wholesalers who sold various products mainly on consignment from others, this new generation of wholesalers sold their own products on their own accounts. Parallel to the rise of specialized wholesalers, money changers emerged as financial specialists. This socioeconomic shift toward commercial and financial specialization was the background of Konoike's gradual withdrawal from commodity trading and full-scale entry into the money exchange business from the Genroku period onward.Footnote 11

As mentioned in Overview I above, one of the key aspects of “novelties” in the Edo period was the significant development of a market economy that was divided into two parts: one within a feudal domain [intra-fief] and the other crossing the borders of feudal domains [inter-fief]. The inter-fief market can be described as a “Shogunate-controlled commodity distribution system.” According to Miyamoto, the Konoike family’s financial business occupied a “central position” in this:

The Konoike’s linked the flow of money from the daimyo side (Osaka to Edo) and the merchant side (Edo to Osaka) through the issuance of money orders, reducing the social cost of sending and receiving cash by converting it to money order fees. This enabled them to function as specialized financiers that facilitated commodity transactions. Konoike’s service was indispensable in the circulation of goods and money under the Shogunate system in which the annual tribute rice collected under the Kokudaka system is exchanged for cash in Osaka, and the money is sent to Edo for the purchase of consumer goods shipped from Osaka to Edo. In this sense, Konoike came to occupy the central position within the Shogunate-controlled commodity distribution mechanism.Footnote 12

The Konoike family, which had come to focus on finance, withdrew from the family’s original business of sake brewing after the death of the second patriarch, Yukimune. From the third Zen’emon, Munetoshi, the Konoike family concentrated on financial lending to feudal lords. Miyamoto offers an interesting argument:

Lending by merchants to feudal lords, or "daimyo lending," is often considered to have become a necessity for impoverished feudal lords, as merchants were growing increasingly wealthy. However, this view is not necessarily correct. It is true that the impoverishment of the Daimyo was a reality back then, and as a result cases of non-payment or defaulting were present since the early days. However, if the impoverishment of the Daimyo was a long-term trend and the merchants were aware of this fact, no rational merchant would have continuously extended loans to such "bad corporations." Nor would they have established the money changing business as their full-time occupation. Regardless of the outcome, behind the decision by Konoike and others to specialize in "daimyo lending" there must have been the belief that this was a lucrative and stable business. Their belief lay in the recognition that the feudal lords had a solid economic foundation so long as they controlled the land, the greatest source of wealth at the time, and rice, the largest commodity.Footnote 13

From all this Miyamoto concludes that “Konoike’s daimyo lending was lending tied to the shipping service for rice and other tribute goods, and in this respect their daimyo lending was innovative.”Footnote 14

“Financial Statement” and Double-Entry Bookkeeping

As we have seen, the chain of innovations by the Konoike family that began with the development of new products, followed by the cultivation of new markets and renewal in logistics, culminated in the deployment of an innovative financial business. In the process, the Konoike family pioneered accounting practices that are important even from a global perspective: establishing the “financial statement” in 1670 (Kanbun 10) within the family. This ledger is “one of the oldest surviving double-entry accounting books used by a merchant family.”Footnote 15 Accounting historian Noboru Nishikawa states:

During the Edo period, as a result of the Sankin Kotai system [a periodic requirement for feudal lords to serve in Edo away from their home], credit transactions developed between Kyoto (the industrial center) and Osaka (the center of commerce and trade) on one end, and Edo (the capital of consumption) on the other. […] In the late 17th century, double-entry bookkeeping developed among the large merchant families of the Kansai region. The surviving examples of double-entry bookkeeping from the 18th century are almost exclusively from large merchant families in the Kansai region.Footnote 16

The Konoike family's financial statement is representative of the double-entry ledgerFootnote 17 developed in the late 17th century in the large merchant families of the Kansai region, as noted by Noboru Nishikawa. He describes it as follows:

There are various theories but no conclusive evidence as to whether the double-entry bookkeeping techniques used during the Edo period originated in Japan or were introduced from Europe through the Shogunate-controlled Nanban trade [with overseas]. However, not even traces of Italian-style bookkeepingFootnote 18 have been found in surviving historical artifacts. Thus, taking into account the development of long-distance trade and credit economies in the late 17th century Japan, the Japanese-style double-entry bookkeeping practice is thought to have emerged indigenously.Footnote 19

Based on Nishikawa’s view, the Konoike family created their double-entry bookkeeping system on their own. As Japan was largely cut off from the rest of the world under its isolationist policy, domestic Japan meant the “world” for the Konoikes. In this sense, the Konoike family created the “world’s first” double-entry bookkeeping system, and they can be rightly called a breakthrough innovator.

The Konoike Family After the Meiji Restoration

The series of innovations introduced by the Konoike family continued through four generations: Shinroku Yamanaka, the founder; Masashige, who was the first Zen’emon; Yukimune, the second Zen’emon; and Munetoshi, the third Zen’emon. In subsequent generations, however, the Konoike family’s innovative streak came to a standstill. Daimyo lending, once a thriving business model in terms of its link to transport of tribute rice and other goods, had fallen to “a catastrophic state in the nineteenth century”Footnote 20 due to the decline in profitability following the upheaval in the Shogunate system. Miyamoto sums up the situation of the Konoike family after the Meiji Restoration as follows:

During the end of the Shogunate and the start of the Meiji Restoration period, the family’s assets substantially decreased, abetted by inflation. In addition, about three-fourths of the Daimyo lending bonds, amounting to about 1.2 million ryo in total, were written off by the new Meiji government, and the family suffered a major blow. In 1877 (Meiji 10), the 10th generation Zen’emon, Yukitomi, together with branch family members, established the 13th National Bank. This bank became the privately owned Konoike Bank in 1897 (Meiji 30), then the Konoike Bank Kabushiki Kaisha in 1919 (Taisho 8), and in 1933 (Showa 8) merged with the Sanjushi Bank and with the Yamaguchi Bank to become the Sanwa Bank. During the Meiji period, the Konoike family as one of the wealthiest merchants in Osaka took a stake in new businesses such as the Osaka Trade and Exchange Inc., Horaisha, Nippon Life Insurance, and Osaka Warehouse, but did not actively participate in the management of these companies. Konoike adopted a conservative approach of maintaining the family fortune through its focus on the banking business, and in 1921 established the Konoike Gomei Kaisha, but did not go so far as to form a zaibatsu.Footnote 21

Unlike Mitsui and Sumitomo, Konoike did not grow to be a zaibatsu, due to the conservative attitude of its management team, according to Miyamoto. Konoike, developing a series of innovations for over four generations starting with the founder, veered off the growth path over time because of its conservatism. How ironic history is.