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

Bank ownership, lending, and local economic performance during the 2008–2009 financial crisis

“…The relatively greater number of firms in localities with a higher share of government bank branches is due to fewer firm deaths as opposed to more firm births. In fact, consistent with Caballero et al (2008), firm births and firm deaths are both lower during the crisis in areas with a higher share of government bank branches. The far greater reduction in firm deaths, however, translates into a relative increase in the overall number of firms.…”

“…Moreover, since firms that rely on external financing for R&D typically cut both R&D and product innovation when they are credit-constrained, any alleviation of constraints during the financial crisis may be beneficial to productivity (Benfratello et al, 2008; Campbello et al, 2010). However, if government banks prop-up unproductive firms (as in Caballero et al, 2008), allocate credit indiscriminately, or misallocate credit on the basis of political affiliations, then we should expect productivity to suffer. Based on the previous results and the existing literature, our prior is that government banks misallocate credit more than they use credit to enhance productivity.…”

The Economics of Interfirm Networks

“…Using data of listed Japanese firms for 1993-1999, Peek and Rosengren (2005) found that banks expanded loans to unprofitable firms during this period. See also Caballero et al (2008) for such "zombie" lending practices by Japanese banks in the 1990s. 3 For this part of their analysis, they used bank-level (i.e., micro) data.…”

Institutional Competition between Common Law and Civil Law

“…Caballero et al (2008) discuss the problem of "zombie" corporations. For this purpose, the governments of crisis-affected economies forged strong links between bank and corporate restructuring.…”