_______________________________________________________________
Yamamura, Kōzō
'The Founding of Mitsubishi: A Case Study in Japanese Business History 'in Business History Review, published by the Harvard Business School
Cambridge University press, Boston, MassachusettsVol. 41, No. 2 (Summer, 1967), pp. 141-160 (22 pages)
This document has the autors biographic first chapter only.
Footnotes and chapter two with the analysis are omitted.
Full article at:https://instruct.uwo.ca/economics/317b-570/Jing_huaMitsubishi.pdf
andhttps://www.jstor.org/stable/3112564
andhttps://www.cambridge.org/core/journals/business-history-review/article/abs/founding-ofmitsubishi-a-case-study-in-japanese-business-history/
D295B92C9696813150C5E8DEFB9C7AB2_______________________________________________________________The Founding of Mitsubishi:
A Case Study in Japanese Business History
By Kōzō Yamamura (1967)

Associate Professor of Economics, San Diego State College

The founder of Mitsubishi Zaibatsu, Yataro Iwasaki, was born in1834 as the eldest son of a peasant who lived "scraping the bottomof the rice bowl". As his father was rarely sober, his hard-working
mother and the financial assistance of his maternal relatives madeit possible for him to attend village schools. His education consistedof Chinese classics and ethics taught by his relatives and by otherlower class samurai of Tosa-han (a feudal domain, the present
Kōchi Prefecture). Little is known of his childhood, but sources
agree on his native intelligence and extreme mischievousness.
When Commodore Perry came to Japan in 1854, Yataro was 20
years old and the tempo of anti-Shogun sentiment was gaining
momentum. It was in this historic year that Yataro, upon therecommendation of his relatives, and with their financial aid, bought
the title of goshi (a low-class country samurai) in order to becomea jūsha (aid to a samurai) of a samurai who accompanied the
daimyo (feudal lord) of Tosa to Edo (Tokyo).
In Edo, he continued to study Chinese classics on a part-timebasis along with his duties, but his stay was out short when he left
for Tosa. to help win freedom for his father who had just been
imprisoned following a fracas in one of his drinking bouts. Yataro
not only failed to achieve his end, but also managed to get himself
imprisoned after insinuating that the prison officials had hoped for a1

bribe. After a brief stay in a village prison, he emerged jobless andwithout prospects. He resorted to eking out a meager living as avillage school teacher.
It was during this period that he came to know Tōyō Yoshida, ahigh-ranking samurai then under house arrest on the charge that hehad struck a fellow samurai. Yoshida had held several important
positions in the han administration and had been known for his
progressive views, which included promotion of the han industries,
international trade, and the adoption of new knowledge from abroad.
In the political reshuffle of 1859, Yoshida was restored to thehan hierarchy. He appointed Iwasaki to a minor position in thebureaucracy. Now 25 years old, Iwasaki had thus benefited fromhis acquaintance with Yoshida to emerge from four years of enforced
inactivity. To overcome his humble origin he worked diligently,
and when his meager finances permitted he “wined anddined” his colleagues to earn promotions. These two ingredients ability and "public relations" - were to become the staples formuch of his later success. In the more peaceful years of theearly Tokugawa era he would perhaps have had ended his life as
an inconsequential bureaucrat of Tosa-han, but this was one of themost turbulent eras of Japanese history. In 1862 his benefactor
Yoshida was assassinated by the conservative extremists of Tosa-han
for his progressive and strongly cosmopolitan views. Iwasaki,
as a protege of Yoshida, was chosen to search and kill the assassinsof Yoshida. Though accounts differ in details, it would be correct
to say that Iwasaki had little interest in this mission of revenge.
After a stay of a few months in Osaka and Kyoto, where most of histime was spent in inns and tea-houses, he returned to Tosa to facea chilly reception from his former colleagues.
Disenchanted with the fruitlessness of the samurai code and thelowliness of his position, he abandoned his samurai status altogether
to become a lumber merchant in spite of much derision on the partof his former colleagues. Though no record is available, one canguess that the venture was started on the modest capital obtainedby selling his title of goshi. However, the lumber business proved
a total failure and Iwasaki at 28 again found himself unemployed.
In 1865, after four more years of idleness, Iwasaki obtained a
low-ranking job with Keiseikan (Industry Promotion Agency) of
Tosa-han. This had been established in 1852 by the daimyo of
Tosa-han upon the recommendation of Tōyō Yoshida. The Agency's
function was to promote sales and production of han-controlled
products to alleviate the financial deterioration which threatened
all han in the last years of the Tokugawa period. Iwasaki, however,found the job dissatisfying and even humiliating, and left the
Position within a year. Nevertheless, in retrospect this was far froma wasted year, for during this period Yamasaki, who was the headof the Agency, noted Iwasaki’s diligence and ability. A year later,when Yamasaki was appointed head of the Nagasaki office of the
Keiseikan to handle the rapidly increasing volume of arms purchases,
he called upon Iwasaki to join him.

2This was in 1867 when the ancien régime was on the verge ofcollapse and "the wind smelled of blood". The Nagasaki office
was buying all the arms it could find for the militant Tosa-han. As
a consequence of the reckless purchase of arms, and throughmismanagement, the office accumulated by the end of 1867 a large
debt of over 200000 ryo. Confronted by this crisis, Yamasaki
now recommended to the han that Iwasaki be promoted to head
the Nagasaki office. The undesirability of the task and Iwasaki's
now recognized ability to deal with arms merchants (especiallyforeigners) proved sufficient to overcome his humble origin which,in the last years of feudalism, had become easier to overlook.
Shortly after this promotion, Iwasaki found himself called upon
to assist with the fund-raising in Osaka, which had become a staging
center for the Restoration forces against the Shogun. Tosa-han,which was massing its troops there, was on the verge of bankruptcy
and could not even provide rations for its army. Though the available
sources as to whether the idea originated with him or someone
else are not clear, Iwasaki soon became involved in the counterfeitingof Shogun coins and the printing of supposedly convertible
han notes to expedite the march of troops. He had, in effect, becomea financial trouble shooter of the han. In the topsy-turvy
condition of the Restoration War, the former jige-ronin came to theattention of the han for his ability. About the same time he had
also succeeded in refinancing the debts of the Nagasaki Agency byborrowing 300000 ryo from an American merchant in exchange forthe exclusive rights to deal in the han’s naphtha (petroleum). The means
which Iwasaki used to consummate these transactions were typical:
coaxing, cajoling, the hint of non-existent rivals, bribes to the American’s
interpreter, flowing champagne (sic), and geisha.
lwasaki busily occupied himself for the next few years in managing
the Nagasaki office and the han monopolies, as well as performing
the services of a trouble-shooter - the role he was frequently
called on to play in those years of rapid political and economictransformation. Thus, when Haihan-chiken (Abolition of Han) came in
1871and Tosa-han withdrew from all former economic activities,
Iwasaki was the logical choice to inherit the business of Tosa-han.
To extricate itself from its large debt of 300000 ryo, the han
presumably gave Iwasaki 230000 ryo in cash, all the assets andprivileges connected with the han business in naphtha, tea, silk,
lumber, coal mining, and its eleven ships (six steamships and five
sailboats). If this is correct, no one can accurately estimate theworth of the transaction to Iwasaki. For one thing the value ofthese han assets was unknown; for another the value of the former
monopoly rights of han business now depended entirely on Iwasaki's
ability to manage them competitively. Perhaps it is more accurate
to say that Iwasaki did not benefit by this transaction per se, but hewas able to gain a strategic foothold that could be exploited.
Immediately following the acquisition of the former han business,
Iwasaki, exploiting the knowledge and connections acquired as a3han official, began to deal in ships of all sizes sold by former hansand foreign merchants. Those who were inexperienced and eager
to sell became easy prey for lwasaki, and those who wereexperienced and shrewd often found themselves outwitted by him.
These sharp dealings, which would have made a Jay Gould orDaniel Drew envious, were reported to have earned lwasaki a small
fortune in addition to his efficient management of former hanbusiness. However, this was nothing compared to what he earned in
the conversion of former han-notes into government notes. The
new government, assuming responsibility for the depreciated former
han currencies, converted the notes of Tosa-han at face value into
Dajōkansatsu (Privy-Councillor's notes). Iwasaki, obtaining theinformation before it reached the holders of former han-notes,
bought up a large quantity and made a considerable fortune.
On the strength of these profits and the successful operation of
the former han business, Iwasaki founded the Mitsubishi Shokai(Trading Firm) in 1873, and his major interest turned to shipping.
The Japanese shipping business at this time was entirely coastal
and fiercely competitive. Iwasaki's competitors were a large numberof small firms with a few vessels each, specializing in short distancehauls, and the Yūbin Jōkisen Kaisha (Steamship Mail Co.). The
latter was organized by the joint capital of wealthy merchants(Mitsui, Ono, and Shimada) enjoying a subsidy from the government,
which, under the leadership of high-ranking officers of the
Ministry of Finance such as Kaoru Inoue and Eiichi Shibusawa,
wanted to see Steamship Mail grow. Iwasaki destroyed most of
the small firms by under-cutting prices and offering longer andbetter-connected shipping schedules; his only competitor now was
the Steamship Mail Co.
To all appearances the duel seemed unfavorable to Iwasaki.
Steamship Mail was “the favorite of the Ministry of Finance andenjoyed the protection and prestige of the new government”,
and had a fleet of fifteen steamships which were bought from thegovernment on a fifteen-year credit basis and a subsidy. Iwasaki’s
fleet was smaller and older and had no subsidy. However,appearances were deceiving. During 1873-1874, after a fierce rate war
which all but ignored safety, Iwasaki managed to defeat his rival.
His victory was due to a thorough exploitation of his competitor'svital weakness and its samurai management. Steamship Mail was
operated “in the most bureaucratic fashion of the old han mentality”.
The officials, still carrying swords, advertised that "those wishing
to be granted permission to use the ships, who request the permission
and pay a proper stun, may then be granted the privilege". The
high-handed attitude of the samurai was evident in "their (ships'
officers’) impolite and often rude manner toward passengers".
Iwasaki, on the other hand, was the very image of a chonin. He
instructed his subordinates (most of them samurai) to “worshipthe passengers” as they were sources of revenue. In short, themodern attitude of "the customer is always right" became the major
weapon of Mitsubishi Shokai. The result was a loss of patronage for
Steamship Mail, and provided Iwasaki with victory in his first contest.

4However, the struggle cost Iwasaki clearly. Far from secure inits financial foundation, his shokai in 1874 was barely on its feetwhen the Formosan Incident occurred. This affair resulted fromthe killing of fifty-four Japanese fishermen who were
shipwrecked on Formosa (Taiwan). Preliminary discussions with
Qing Dynasty China, which owned the island, were fruitless.
China dismissed the incident as mob violence andrejected all responsibility for the incident. Japanese public
opinion immediately became inflamed. The cabinet thereupon
decided to embark on punitive action on Formosa. With five large
steamships borrowed from an American and an English shipping
firm as its core, the government readied in Nagasaki a convoy tocarry 3650 soldiers to Formosa. Learning of the impending attack
on Formosa, China appealed to the United States and England tohelp avert the attack. The two Western powers reacted by declaring
their neutrality in the matter and by ordering their respective
firms to withdraw the ships. This action by the United States andEngland dismayed the Japanese cabinet, which by then waspolitically committed to the attack.
To replace the ships withdrawn by the American and English
shipping companies, the government in May hastily bought thirteen
ships at a cost of $1506800 from those Western companies who
were willing to sell, while the Japanese expedition forces waited in
Nagasaki. Soon afterward the contract to operate the government
ships and transport men and material was given to lwasaki. There
were two major reasons for favoring Mitsubishi Shokai over Steamship
Mail. One was a change at the top level of the government, which hadtaken place following a political dispute on the question whether or not
to invade Korea. Shigenobu Okuma had become the new Minister ofFinance. This meant that the former Minister of Finance, Inoue,
a staunch supporter of Mitsui interests and Steamship Mail, hadbeen replaced along with Eiichi Shibusawa, who also left his
position in the Finance Ministry. The second reason was that, given
the political antagonism of the two factions, Okuma was forced tosupport a shipping firm other than Steamship Mail which hispolitical opponents supported, and this meant support for lwasaki.
Iwasaki had also worked feverishly to win the friendship of
Okuma in anticipation of the latter’s political role, and after Okuma
had become the Minister, Iwasaki intensified his efforts to get themost favorable terms for his contract. Or, as one writer put it, “after
a great deal of campaigning behind the scenes - mostly at famous
inns and geisha houses - Iwasaki succeeded in talking these two(the Prime Minister and the Minister of Finance) into giving him
the contract on his terms”. Though there is no agreement among
the sources on the details of Iwasaki’s profits resulting from the contract, no one disputes the fact that this contract solidified the
Mitsubishi Shokai.
The Formosan Incident, and the “friendship” of Okuma to Iwasakichanged the face of the Japanese shipping industry overnight.
This exceedingly unprofitable expedition for Japan benefited5

Iwasaki in more ways than one. Steamship Mail, now on
the verge of bankruptcy because of sharply reduced patronage andloss of the government subsidy, asked the government to buy up
the company's eighteen ships at 325000 yen. The government
obliged and resold them to lwasaki on a loan of fifteen years at 3
per cent. In addition, the government gave Iwasaki the thirteen
ships it had bought for $1506800 earlier, plus an annual subsidy
of 250000 yen. The major condition of this windfall for Iwasaki stipulated in the so-called First Decree - was that the recipient
was to open a route between Shanghai and Yokohama.
Ostensibly this was to promote the Japanese shipping industry,
but in examining the terms of “protection of infant industry” itwould be extremely difficult to deny that lwasaki's “wine-and-dine”
policy, and his financial contributions to the Okubo-Okuma alliancewere not important reasons for such a policy as "protecting a Japanesecompany". Iwasaki, now owner of thirty-seven ships amounting
to 23385 tons, became a virtual monopolist of coastal shippingand stood ready to compete for international routes.
For the next two years (1874~1876), the government's “protection”
and Iwasaki's interests appeared to coincide sufficiently tostifle any open public opposition to the nature of “protection”.
When Mitsubishi Shokai began to operate the Shanghai-Japan routein 1874, Iwasaki met stiff opposition from the American Pacific Mail
Steamship Co. which had had a virtual monopoly of the route since1870. The American shipping firm, having four large (over 1000tons) steamships, and offices in major Japanese ports, fought Iwasaki
vigorously throughout the summer and fall of 1874. However,lwasaki's price-cutting (supported by a government subsidy of
250000 yen), a newspaper campaign for Japanese patronage of"Japanese ships", and other government supports, resulted in arequest by the American firm to be bought out. As a result, Iwasaki
was able to borrow $800000 from the Ministry of Finance, overcoming
Okuma's astonishment at the former’s “thick-skinned” request.
With this loan, Iwasaki bought six ships and associatedwarehouses and wharves from Pacific Mail Steamship.
Immediately following this duel, Iwasaki faced another challenge
by the Peninsular and Oriental Steamship Co. (P&O) early in 1876.
This English adversary was stronger than its American predecessor,
and the Hong Kong-Shanghai-Yokohama route became an arena ofcompetitive price-cutting and patronage promotion. The competition
proved costly tor Iwasaki. His tenacious rival fought on fromMarch into August of 1876, forcing Iwasaki to cut all salaries inhalf. But P&O finally yielded in August as it began to realize
the futility of challenging a well-subsidized Japanese firm which
had begun to benefit from the new and cumbersome regulations
imposed on those Japanese who desired to use foreign ships.
Iwasaki was rewarded for his efforts by a fourteen-year extensionof the subsidy. The so-called Second Decree, which granted thisextension, stipulated his responsibility to open a Korea-Japan routeand “strengthen” coastal shipping.

6In 1877 lwasaki reaped large profits from his part in the Satsuma
Rebellion. The most critical element of this civil war was coastal
shipping, and Iwasaki controlled it. Knowing his power, lwasaki
was in a position to dictate the terms of his service to the government
which had just aided him through two competitive struggles
against foreign firms. He not only was awarded the contract to ship
men and material to Kyushu at a large profit, but also succeeded ingetting a government loan of $700000 on a fifteen-year term at
virtually no interest. By the end of 1877, Iwasaki owned over 80
per cent of all ships in Japan and controlled her coastal trade.
The following few years were Iwasaki’s golden years in profit andin social status. He extended his business into marine insurance andwarehousing, which customers of Mitsubishi ships were required touse. During the post-Rebellion inflation, he decreed that payments
be made in Mexican dollars. This had the effect of raising the priceof his services by 60 to 70 per cent as the Japanese yen had rapidly
depreciated. He also eliminated middlemen in producing areas
and wholesalers in consuming areas by means of forward-and-backward integration. However small the remaining shipping firms
might be, Iwasaki continued to weed them out by price-cutting andby refusing to transship goods handled by other companies. Socially
he dined with cabinet members, and the Minister of Financefrequented his house. Some began to call him "Gozen-sama", or theequivalent of His Excellency, an expression normally reserved for
Privy-Councillors and former daimyo.
In 1880, what could be termed the Mitsui group attempted tochallenge the Mitsubishi Shokai. Led by Inoue and Shibusawa, theMitsui Zaibatsu, which had been forced to use Iwasaki's services,
organized Tokyo Fūhansen Kaisha (Tokyo Sailboat Co.) with themodest capital of 300000 yen. Though the firm could not havebecome a serious threat to Iwasaki's monopoly, Iwasaki made it
known that anyone who contemplated joining this new firm bycapital subscription or use of its services would be penalized by anymeans at his command. Nor did he hesitate to resort to libelous
statements about the highly respected Shibusawa’s personal conduct
in order to discourage support of the new company. Under
these circumstances, Tokyo Sailboat disbanded soon afterwards.
Iwasaki, confident of his power, intensified his efforts to integrate
his business backward and forward. The rate structure was set andreset - in modern jargon - to exploit price elasticity of the respective
commodities and other characteristics. His services deteriorated,and much of his profits were diverted to his other business activities
rather than in the maintenance of his ships. Popular resentment was
clearly evident as newspaper articles during 1880-1882 indicate.
For example, Ukichi Taguchi, a close associate of Shibusawa
wrote in Tokyo Keizai Zasshi (Tokyo Economic Journal) that:"
Yataro accumulated wealth and his luxuries were unparalleled. Frequentdinners given by Iwasaki in the company of dignitaries boasted the bestof geisha, of amusements and delicacies of both land and sea. Much was7spent on such occasions, but much was gained later because these dinners
returned profits in friendship - the friendship of those who could favor him.
"
and that:"
Mitsubishi fails to repair its ships, but is not shipping its business? Is there
not a subsidy for repairs available also? Is the large subsidy insufficient?
The answer is that Iwasaki, since 1878, has diverted a large amount of his
funds for other activities. His interests (in banking, mining, newspapers,
and marine insurance) are reported to exceed one million yen. This wealthexplains the use to which government subsidies have been put.
"
These smouldering resentments soon resulted in the beginning of
the celebrated Umibōzu (Sea Monster) Affair. Reminiscent of
the “muckraking” literature in America, the attack on Iwasaki by
the press became wholesale and unsparing. He was charged with
reducing the number of ships by six since 1875 in spite of therapidly rising demand for shipping, with charging exorbitant
rates, and with indulging in all sorts of predatory and monopolistic
practices such as tie-in sales and backward-and-forward integration.
The writers of these articles were especially incensed bylwasaki's use of the Mexican dollar as a means of payment for his
services. In these journalists’ minds this indicated "lwasaki's totallack of respect for the nation which helped him to become thelargest ship owner in Japan". These journalists toured the nation
with the political opponents of Okuma condemning Iwasaki, andthe latter was hung in effigy at well-attended "Eliminate the Sea
Monster" rallies.
"On the podium were paper models of ships, and an effigy
of a sea monster made of straw. Speakers castigated the evilsof Mitsubishi. When a succession of orators had succeeded inarousing the feelings of the audience, the paper ships and theeffigy were burnt in the midst of the yelling crowd."
In the meantime Okuma, who had left the Ministry of Financeat about this time, grew increasingly anxious to dissociate himself
from Iwasaki. Okuma himself was in a series of political difficulties
and faced charges of corruption. The government then came under
the control of the faction displaced earlier by the Okubo-Okuma
coalition. During these years, too, the public, championed by the
emerging political parties, began to demand an elected gikai (Diet).
The Kyodo Unyu Kaisha (Cooperative Transport Co.) was
formed under these circumstances. The new shipping company,
formed explicitly to challenge the Iwasaki empire, was capitalized
at 6000000 yen, a huge sum by the standards of the time. The
government contributed to this venture twelve large steamships
and a new cruiser, originally built for the Navy and valued at
1700000 yen. The steamships were rented to the new company forthe extremely low fee of 3 per cent of the net profit of the company.
The year 1883 saw one of the fiercest competitions in the historyof the Japanese economy. While the newspapers and public watchedwith partisan concern, both companies competed for speed and8

service, and rates began to tumble. The pre-competition passenger
rate of 5.5 yen between Kobe and Yokohama, for example,
soon fell to 1.5 yen and by the middle of 1884 dropped to 55 sen,
one-tenth of the original price (100 sen = 1 yen). Both companies
gave gifts (towels and fans), often valued at around 30 sen, to theircustomers, and speed and punctuality were competitively advertised
while explosions of over-taxed boilers increased.
The competition was dangerous and costly. As the number of
sea accidents multiplied, losses sustained by both participants
mounted. In the last six months of 1884, Mitsubishi suffered losses
totalling 680000 yen and Cooperative 1000000 yen, one-sixth of
its original capitalization. By the end of 1884 it was clear to boththat further struggles meant bankruptcy for one or even for both.
The first move for a possible merger came from Cooperative which
was an ally of the government, a group led by Mitsui interests, andother anti-Iwasaki elements whole sole interest was to spoil themonopolist’s profits rather than to fight tor the principle of "killingthe sea monster for the good of the country". After a series ofstormy discussions among the shareholders of Cooperative, the twocompetitors finally concluded merger negotiations in January of1885. The new shipping company was named Nippon Y ūsen Kaisha(N.Y.K.) and Mitsubishi Shokai became its largest shareholder.
While the outline of the merger was taking form, lwasaki’s healthdeteriorated. On February 7, 1885, he died of stomach cancer at
the age of fifty-two, only twenty years after he had joined theNagasaki office of the former Tosa-han. The funeral of the erstwhile
jige-ronin was "attended by 50000, including all who counted at allin the political and economic circles of japan in the early Meiji years".

M.Eickhoff, 6.2023, oakhouse.de____________________________________________________________________

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