Zombie Lending and Depressed Restructuring in Japan

Abstract

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 wellknown observation that

Credit Misallocation During the European Financial Crisis

“…Despite the substantial differences in the settings, particularly in terms of firms included in the exercise (listed firms for the other papers, all firms in our case) and definition of reference group (country-sector-year vs. province-sector-year), the magnitudes are also comparable, particularly with Caballero et al (2008). They find a β 1 of -0.0454, very similar to ours, and a β 2 of -0.0232 (-0.0188 in the specification with sector-year fixed effects), smaller than our estimates of around -0.07.…”

Bubbles, Crashes, and the Financial Cycle: The Impact of Banking Regulation on Deep Recessions

“…This can be verified in (Figure 4(2a), green curve) which indicates the number of banks that become inactive due to a binding liquidity constraint. Note that at the moment of the credit crunch, around period 275, the number of illiquid small firms is higher than the number of illiquid large firms, which is an indication of an indirect contagion effect through the banking system which we could call the Zombie-effect (see Caballero et al, 2008). The Zombie-effect is the notion that a small number of unhealthy firms with a high risk profile hamper the ability of banks to provide liquidity to other, more healthy firms.…”

“…The number of active firms however remains at an artificially high level (Figure 4(1b)), since large firms that are actually insolvent and that should have been credit rationed much earlier -if the constraint had been more restrictive -are kept alive almost artificially by the banks. We identify such unsound firms as Zombie-firmsà la Caballero et al, 2008. In this case the illiquidities are being caused by a binding liquidity constraint of the bank around period t = 300.…”

The Development of the Global Financial Market in the Economic Cycle

“…The second case, generally regarded as an example not to follow, is what happened in Japan in the wake of its financial bust, which took place roughly at the same time in the early 1990s (eg, Nakaso (2001), Fukao (2007), Peek and Rosengren (2005), Caballero, Hoshi and Kashyap (2008)). The authorities were slow to recognise the balance sheet problems and, without an equivalent external crisis, had much more room to use expansionary monetary and fiscal policies.…”