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Zombie Lending and Depressed Restructuring in Japan

SSRN Electronic Journal
2006
  • 16
    Citations
  • 11,604
    Usage
  • 8
    Captures
  • 0
    Mentions
  • 0
    Social Media
Metric Options:   Counts1 Year3 Year

Metrics Details

  • Citations
    16
    • Citation Indexes
      16
  • Usage
    11,604
    • Abstract Views
      11,039
    • Downloads
      565
  • Captures
    8
  • Ratings
    • Download Rank
      98,031

Article Description

In this paper, we propose a bank-based explanation for the decade-long Japanese slowdown following the asset price collapse in the early 1990s. We start with the well known observation that most large Japanese banks were only able to comply with capital standards because regulators were lax in their inspections. To facilitate this forbearance the banks often engaged in sham loan restructurings that kept credit flowing to otherwise insolvent borrowers (that we call zombies). Thus, the normal competitive outcome whereby the zombies would shed workers and lose market share was thwarted. Our model highlights the restructuring implications of the zombie problem. The counterpart of the congestion created by the zombies is a reduction of the profits for healthy firms, which discourages their entry and investment. In this context, even solvent banks will not find good lending opportunities. We confirm our story's key predictions that zombie-dominated industries exhibit more depressed job creation and destruction, and lower productivity. We present firm-level regressions showing that the increase in zombies depressed the investment and employment growth of non-zombies and widened the productivity gap between zombies and non-zombies.

Bibliographic Details

Ricardo J. Caballero; Takeo Hoshi; Anil K. Kashyap

Elsevier BV

Japan; zombies; investment; employment; job flows; restructuring; bankruptcy; creative destruction; productivity; congestion; sclerosis; scrambling; distortions; lost decade; subsidies

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