Zombie Lending and Depressed Restructuring in Japan

Ricardo Caballero (), Takeo Hoshi and Anil Kashyap

No 12129, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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 do 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.

JEL-codes: E44 G34 L16 O53 (search for similar items in EconPapers)
Date: 2006-04
New Economics Papers: this item is included in nep-fdg, nep-fin, nep-fmk, nep-mac and nep-sea
Note: EFG CF ME
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Citations: View citations in EconPapers (60)

Published as Ricardo J. Caballero & Takeo Hoshi & Anil K. Kashyap, 2008. "Zombie Lending and Depressed Restructuring in Japan," American Economic Review, American Economic Association, vol. 98(5), pages 1943-77, December.

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Journal Article: Zombie Lending and Depressed Restructuring in Japan (2008)
Working Paper: Zombie Lending and Depressed Restructuring in Japan (2006)
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