I-123 was one of only four submarine minelayers in the Imperial Japanese Navy — a class known in Japan as Kiraisen-type, formally the Kirai Fusetsu Sensuikan. Her keel was laid on 12 June 1925. She and her three sister ships, I-121, I-122, and I-124, were a small and specialised force, designed to deploy mines covertly in enemy waters. Commissioned in 1928, I-123 spent the years before the Pacific War on training and patrol duties, visiting the Caroline Islands, Marshall Islands, and Mariana Islands during a 1940 cruise with her division. By December 1941, when Japan attacked Pearl Harbor and swept through Southeast Asia, the submarine and her crew were ready.

I-123's war took her across the breadth of the Pacific. She supported the Japanese invasion of the Philippines in late 1941 and early 1942. In May 1942, as Japan prepared a second strike against Pearl Harbor through a planned reconnaissance by flying boats launched from submarine-carried floatplanes, I-123 was sent to French Frigate Shoals — a remote atoll northwest of Hawaii — to refuel the aircraft. She arrived on 29 May to find US Navy seaplane tenders and flying boats already operating in the lagoon. She surfaced at night to radio the news. The reconnaissance was postponed, then cancelled. The broader plan, the Battle of Midway, ended in decisive Japanese defeat.

I-123 then took patrol station in support of the Midway invasion before concluding her patrol at Kwajalein on 25 June 1942, the invasion having been abandoned.

The Guadalcanal campaign opened on 7 August 1942 with US Marine Corps landings on the island. I-123 departed for her fifth war patrol the same day. She was initially ordered to operate off Indispensable Strait but was diverted to reconnoitre Lungga Roads off Guadalcanal's northern coast. On 12 August 1942, she surfaced 700 yards off Lungga Point and bombarded Marine Corps positions, firing 14 rounds from her deck gun. The Marines returned fire. I-123 submerged without damage.

Over the following two weeks, she attempted to make contact with Imperial Japanese Army units at Taivu Point and with a coastwatcher unit on Florida Island — both without success. On the night of 28 August, a Allied seaplane forced her to submerge. She transmitted a message reporting the encounter at 03:12. The Japanese Navy never received another signal from her.

USS Gamble tracked I-123 using a magnetic anomaly detector — then a relatively new technology — and conducted depth charge attacks over the course of three hours between 08:44 and 11:47 on 29 August 1942. A large air bubble broke the surface after the last attack. Another Japanese submarine operating nearby reported hearing the explosions.

On 1 September 1942, the Imperial Japanese Navy declared I-123 presumed lost with all 71 hands. She was stricken from the Navy list on 5 October 1942. The 71 men who served aboard her — their names preserved in Japanese naval records — remain with the submarine in the waters east of Savo Island, in the stretch of ocean that came to be called Ironbottom Sound for the number of ships that sank there during the Guadalcanal campaign.