HH Japan's Well-Fed Zombie Corporations

The corona crisis has intensified the discussion about the zombification of the economy; enterprises have become more dependent on government bailouts, loans, subsidies, short-time working benefits, and loans from central banks. Governments around the world claim the measures to be only temporary. Yet Japan’s experience suggests that the reliance of enterprises on public support can continue in one form or another. Japan’s enterprises have long relied on the state and more so during the corona crisis, a path that the US and Europe seem to be following.

There is no formal definition of zombie enterprises. Investopedia defines an enterprise as a zombie if it earns just enough to keep operating and to service its interest but is unable to pay off the interest or to invest. An Organisation for Economic Co-operation and Development (OECD) study views a zombie as a firm that cannot cover its interest payments with profits for several years (Adalet McGowan et al. 2017)Caballero, Hoshi, and Kashyab (2008) pay attention to the role of banks, which extend financing to otherwise insolvent borrowers at the expense of profitable firms. Such a lenient practice of extending loans to distressed borrowers is also referred to as forbearance lending (Sekine et al. 2003).

Seen through the lens of Adalet McGowan et al. (2017), the number of zombie firms decreases if central banks gradually lower interest rates. Yet, the number of zombie firms is supposed to increase when central banks ease financing conditions such that enterprises with weak profitability are kept alive. If the loose monetary policy is perpetuated, the efforts of enterprises to increase efficiency and innovate diminish (Leibenstein 1966). Enterprises are "evergreen" (Peek and Rosengreen 2005), while aggregate productivity gains and real growth decline. The high stock of (potentially) nonperforming loans lies with zombie banks, which survive because the government provides explicit or—through persistently loose monetary policy—implicit guarantees (Schnabl 2015).

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