Case 3 Genzaemon Nakai: A Regional Merchant Thriving on the National Stage

Abstract

This chapter introduces Genzaemon Nakai, a lacquerware merchant from the Omi region (Shiga Prefecture), and the establishment of a new goods circulation business model based on a network of joint ventures.

The Rise of Omi Merchants

Merchant families that introduced innovative practices during the Edo period were not limited to the “Big Three Merchant Families,” Konoike, Sumitomo, and Mitsui. The Nakai family, one of the Omi merchants to be discussed in this chapter, were also standard-bearers of innovation. Author Yotaro Sakudo first presents Schumpeter’s theory of innovation with creative innovation as its core concept, and then asks whether it is possible to verify the existence of such creative innovators in the Edo period.¹ Sakudo goes on to say that “Schumpeter’s perspective is also extremely useful in examining the nature of innovation regarding merchants’ entrepreneurial activities during the Edo period”²:

These families are all engraved with the history of innovative entrepreneurial activities. The Konoike family, which started off with sake brewing business, moved on to the shipping business, and then started a money changing business, before establishing daimyo lending as its core business; the Sumitomo family, which started from pharmaceuticals and publishing, and later changed to copper refining, ran diversified businesses involving copper trading and copper mining, currency exchange, and rice warehousing; the Mitsui family accomplished the contemporary Edo merchants' dream of becoming the "Kyoto merchant with an Edo store" through kimono and money exchange businesses; the Nakai family accumulated capital through the "mochikudari akinai" business [selling their home region's product in another region and bringing back the other region's product for sale at home], using the Omi Hino region's medicinal products, opening stores in various parts of Japan such as Sendai, Otawara, Nagoya, Onomichi, and Kitsuki, in addition to Osaka, Kyoto, and Edo.³

In other words, Sakudo regards the Nakai family as an embodiment of innovation on a par with the “Big Three Merchant Families.” As already mentioned in Overview I, one key aspect of “novelties” in the Edo period was the development of the market economy that brought about expanded business opportunities to regional merchants such as those in the Omi region. It became possible for them to enlarge their business, peddling and opening stores all over the country, and to accumulate capital—a brand new business model at the time.

Masamichi Mizuhara explains:

The extent of Omi merchants' capital accumulation through peddling was manifested in the form of store openings. They also used these outlets as a foothold for the peddling business, but gradually shifted to store management, opening outlets wherever they were likely to be able to eat “rice from a pot” or locations of a large consumer population, except Hokkaido. At their outlets, Omi merchants sold their goods to local merchants, and also travelled, peddling their wares in surrounding farm villages. However, since these were mainly credit sales, the cash-strapped farmers were often forced to produce merchandise requested by Omi merchants, in lieu of cash payment. This consequently led to the development of the commodity trade in the Edo period. For example, the 4th generation Genzaemon of the Nakai family was commissioned to promote industry in the Sendai territory. He lent funds to the locals to increase the production of raw silk and safflower.

Omi merchants set up branch networks across Japan and played a role in promoting the development of the monetary economy. Typically, family headquarters remained in Goshu,⁴ and wives and children also stayed there. The Omi merchants did not keep merchandise in their home region but rather gave instructions to branch managers who were in charge of running regional outlets. The head of the family traveled almost year-round to inspect his regional outlets, a practice known as "Mise mawari."⁵

Thus, the advancement of commodity trading during the Edo period was a prerequisite for Omi merchants to play an active role on a national scale. In turn, the activities of Omi merchants, including those of the Nakai family, further promoted the commodity trade, leading to synergy between the two.

The Nakai Family Tree

The description of this period comes primarily from op. cit., Mizuhara, M. (1978), pp. 184–191.

The ancestors of the Nakai family moved to Hino, Omi (Hino-cho, Gamo-gun, Shiga Prefecture) around 1584 (Tensho 12). They engaged in the manufacture and sale of Hino lacquerware (Hino Nuri) and expanded their peddling area, but after the death of the family head Mitsuharu in 1725 (Kyoho 10), the family rapidly fell into hardship. The family was saved from crisis by Mitsuharu’s heir, Mitsutake, who solidified the foundation of the Nakai family. Through hard work, Mitsutake, born in 1716 (Kyoho 1), gradually increased the family’s wealth from 1734 onward (Kyoho 19) by peddling Hino’s specialties, such as lacquerware, compound medicine, and “futomono” textiles.⁶

According to Masamichi Mizuhara, “The first full-scale regional outlet was established in 1749 (Kan’en 2) in Otawara, Shimotsukeno-kuni [today’s Tochigi Prefecture area], located in a strategic geographical area leading to the Oshu region [today’s Tohoku region]. This was when Mitsutake was 34 years old. Although his initial capital was two ryo, by that time it had grown to 775 ryo and 1 bu.”⁷

Mizuhara continues:

At the Otawara store, the types of products handled grew to include multiple varieties of medicines in addition to the existing compound medicine and “futomono” fabric, and the concurrently run joint venture pawn shops and breweries also expanded from the Kanto region to the southern part of Ou region, securing a foothold for expansion into the Tohoku region. Thus, in 1769 (Meiwa 6), when the family’s business celebrated its 35th anniversary, total assets had reached 7468 ryo and 2 bu, and the family was listed in Japan's ranking of highest earners. That year that the Nakai family made great strides. They simultaneously opened outlets in Sendai, Fushimi, and Tango, with the family fully shifting from peddling to a store-based business. The purpose was to carry out the so-called "goods circulation" (sanbutsu mawashi) method of trade: First, transport cotton fabrics and "furute"⁸ that were in poor supply in the Tohoku region to Tohoku from the Kansai region. Then transport raw silk, safflower, and "aoso"⁹ from Tohoku to Kansai. Thereafter, transport raw silk to the textile manufacturing areas of Kyoto or Tango.¹⁰

The deployment of this “goods circulation” method on a large scale using a type of intra-company, product forwarding mechanism was the innovative business model through which Mitsutake managed to revive the family’s fortune. The prerequisite for its success was the development of a national-scale market during the Edo period, but the Nakais in turn also helped encourage such a development. Some of the stores opened by Mitsutake were unsuccessful, but as a whole the store network continued to grow as a whole, with openings in Soma, Imaichi, Edo, and Kyoto and elsewhere. “The most successful one was the Sendai store, which in 1803 (Kyowa 3) had assets of over 49,405 ryo on a stand-alone basis.”¹¹

Mitsutake, who effectively founded the Nakai family, had come to assume the name Genzaemon. After that time, the name was passed down from generation to generation. In the present “Case 3,” the founder Mitsutake and other successive Genzaemons will be collectively called “Genzaemon Nakai,” and their business activities examined. Mitsutake retired in 1794 (Kansei 6), handing over the leadership to his second son, Mitsumasa.¹² Mitsutake died in 1805 (Bunka 2).

Mitsumasa, the second generation Genzaemon Nakai, adopted the business model pioneered by his father and continued to open stores nationwide in places such as Osaka, Uzen-Tendo, Rikuzen-Ishinomaki, and Bungo Kitsuki. Mizuhara states that “In 1797, Mitsumasa inherited a fortune of 30,100 ryo, but he was a remarkably talented businessman, and increased his assets to 56,299 ryo by the time of his death just over a decade later, in 1808 (Bunka 5).”¹³ It is notable that in the “Nakashi Seiyo,” a collection of family precepts, Mitsumasa warned against joining forces with feudal powers.

The Nakais continued to open new outlets during the leadership of the third generation Genzaemon, Mitsuhiro. These were the Nagoya store and the Minato store (a branch of the Ishinomaki store). According to Masamichi Mizuhara, “Mitsuhiro increased the family’s wealth from over 50,000 ryo to over 110,000 ryo in the twenty-five years before his death at the age of 48 in 1833, so that he too fully utilized his talent as a businessman.” ¹⁴

The Nakai family business that had been growing steadily up to this point took a darker turn during the reign of Mitsumoto, the fourth Genzaemon. At the time, the Tokugawa Shogunate was nearing its end, and as the upheaval in the shogunate system intensified the feudal domains across Japan began increasing the amount of gold and silver taxes levied on Nakai’s outlets. As part of an effort to mitigate such payments, Mitsumoto closed the Minato, Soma, and Rikuzen-Ishinomaki branches, and downsized the Nagoya, Uzen-Tendo, and Osaka branches, to concentrate on the Sendai and Kyoto stores.

During the time of Mitsuyasu, the fifth generation Genzaemon, the Nakais suffered a great deal of damage because the new Meiji government refused to repay the loan the family provided to the Sendai clan. The Sendai store was eventually closed around 1889–1890 (Meiji 22–23) so that only the Kyoto store to remain with the sixth generation Genzaemon, Mitsutada. Although the family opened the Kobe store in 1934 (Showa 9), all of the Nakais’ outlets eventually closed by 1942 (Showa 17).

Epoch-Making Nature of the Nakai Management Style

The history of the Nakai family‘s fortune clearly shows that the first patriarch, Mitsutake, was outstanding in terms of the innovative practices he introduced to business management. His innovation was passed down to the second and third generations, Mitsumasa and Mitsuhiro respectively.

What was the essence of the Nakais’ innovative practices that spanned the three generations? Their speedy response to greater business opportunities brought about by the nationwide development of a market economy, and the shift from peddling to store-based businesses through the establishment of the new business model, “sanbutsu mawashi” (goods circulation).

However, in order to successfully manage multiple stores simultaneously, the Nakais had to raise a large amount of capital. They also had to devise a system to efficiently oversee each store. In his study of the Nakai family’s approach to these challenges, Takehisa Yamada explains as follows (based on Tsuneharu Egashira’s research)¹⁵:

Omi merchants in the early modern period (...) expanded their peddling business to rural areas in the Tohoku and Kanto regions, and set up stores in various places. To give an example of a highly successful family, the Nakai Genzaemon household in Hino, Omi, started a compound medicine business in the Kanto region in 1734 (Kyoho 19), shifted from peddling to a store-based business, and expanded their geographical reach from Ou to Kyushu. The family set up more than 20 stores nationwide, engaging in various types of business, establishing joint ventures, managing stores as joint organizations with local merchants, and setting up branches with extended families. At each of these stores, accounting books with double entry structure were used, and the business steadily expanded under the joint ventures. In the Tohoku region, the Otawara store and Sendai store supervised multiple branches in a form akin to a joint-stock company with local merchants.¹⁶

In order to raise the necessary funds for multiple new stores and also oversee each of these stores, the Nakai family adopted the joint venture style, enlisting others to contribute funds. Mizuhara classifies the Nakais’ joint ventures into the following four types:

• 1. Cases in which the Nakai family served as the investor with managerial functions, and other investors only contributed money and were equivalent to unlimited liability, equity investors (Sendai, Fushimi, and Ushirono branches).

• 2. The Nakai family formally served as the investor without any managerial functions, but in reality the Nakais were in control of accounting audits and business decision-making. The day-to-day operations (manufacturing-related) were taken care of either by a local investor with managerial functions or by an operator without an ownership stake. In addition, sometimes 2–3 additional investors contributed funds without assuming managerial roles (Tendo, and Onomichi branches).

• 3. A joint venture between one investor with managerial functions (local operator), and the Nakai family in which the family did not assume any formal managerial functions [...] but reserved the right to make decisions. (Otawara, Koizumi [Otoawara store’s branch], Oshitate, Kitsuki, Hinosada [Sendai store’s branch], Hinoman, and Hinogin branches).

• 4. A joint venture between the Nakai family and their manager. The Nakai family served as the investor with managerial functions, and the manager would only provide labor (Soma branch).

Mizuhara paid close attention to the first and second types in which the Nakais “solicited investment from others who would only contribute money without assuming managerial functions,” adding that “these resembled unlimited liability companies, but they are worthy of our closer attention as pioneering cases of Gomei Kaisha, in which managers have unlimited liability and other investors have limited liability.”¹⁷ By comparison, in the case of joint ventures created by big city merchants such as Konoike and Mitsui, it was often family members who contributed funds. Mizuhara notes: “Rather than collecting funds from others, a considerable emphasis was put on the prevention of asset dispersal.”¹⁸

Thus, the Nakais gave birth to a new business model called “sanbutsu mawashi,” pioneering new forms of joint capitalization through store openings across Japan. This is yet another example of breakthrough innovation achieved during the Edo period.

The Limits of the Nakai Family and Their Background

Despite the innovative business practices introduced by the three first generations of Nakai Genzaemon, the Nakai family was at the mercy of the political turbulence during the Edo-Meiji Restoration period and failed to grow after the Meiji era.

Mizuhara explains:

One reason the Nakai family, unlike the Mitsui family, failed to make great strides after the Meiji period , might be due to their continuing relationship with the Sendai clan, despite the family precepts against joining forces with feudal lords, a relationship that led to significant losses. But more importantly, the Nakais had allowed family assets to be divided among heirs during the transfer of power from the first to the second generation. Such dispersal of family assets had always been forbidden in the Mitsuis, Konoikes, and other prominent merchant families. The Nakais also suffered from a lack of human capital.¹⁹

As mentioned, the family’s relations with the Sendai clan dealt a heavy blow to the Nakais. When the transition from the first generation to the second took place, what was the form of “dispersion of property”? Mizuhara describes it thus:

In 1797 (Kansei 9), Mitsutake distributed his estate, assigning the main house and Sendai and Soma branches (total capital of 31,000 ryo) to Mitsumasa; Kyoto and Onomichi branches (total capital of 23,373 ryo) to his third son, Seijiemon Takenari; the Otawara and Koizumi branches (total capital of about 10,000 ryo) to Mitsutomo, the son-in-law of Riyo, the bereaved daughter of his eldest son, Genjiro, for Mitsutomo to carry on the name Genzaburo. Furthermore, Ichizaemon, the husband of Mitsutake's third daughter Fumi and adopted son of Mitsutake's older sister, was not given a branch, but was given gold (about 5,815 ryo), and thus the Seijiemon, Genzaburo, and Ichizaemon families became separate branches.²⁰

Such “dispersal of family assets” may have been inevitable for the family running multiple stores nationwide through a “goods circulation” business. The Nakais, the Konoikes, and the Mitsuis all adopted a joint-venture style of business, but this style led to contrasting results: for the Nakais, it contributed to the dispersion of family assets, while it worked for the Konoikes and the Mitsuis to prevent such an outcome.