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Zombie Lending and Depressed Restructuring in Japan

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

Abstract

Large Japanese banks often engaged in sham loan restructurings that kept credit flowing to otherwise insolvent borrowers (which we call zombies). We examine the implications of suppressing the normal competitive process whereby the zombies would shed workers and lose market share. The congestion created by the zombies reduces the profits for healthy firms, which discourages their entry and investment. We confirm 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 G21, G32, L25)

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 98 (2008)
Issue (Month): 5 (December)
Pages: 1943-77

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Handle: RePEc:aea:aecrev:v:98:y:2008:i:5:p:1943-77

Note: DOI: 10.1257/aer.98.5.1943
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  1. Ogawa, K. & Kitasaka, S.-I., 2000. "Bank Lending in Japan: its Determinants and Macroeconomic Implications," ISER Discussion Paper, Institute of Social and Economic Research, Osaka University 0505, Institute of Social and Economic Research, Osaka University.
  2. Xu Yi & Nezih Guner & Gustavo Ventura, 2004. "Macroeconomic Implications of Restrictions on Size," 2004 Meeting Papers 879, Society for Economic Dynamics.
  3. Sakai, Koji & Uesugi, Iichiro & Watanabe, Tsutomu, 2008. "Firm Age and the Evolution of Borrowing Costs: Evidence from Japanese Small Firms," PIE/CIS Discussion Paper, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University 354, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
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  5. Yasushi Hamao & Jianping Mei & Yexiao Xu, 2007. "Unique Symptoms of Japanese Stagnation: An Equity Market Perspective," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 39(4), pages 901-923, 06.
  6. Ben S. Bernanke & Henning Bohn & Peter C. Reiss, 1985. "Alternative Nonnested Specification Tests of Time Series Investment Models," NBER Technical Working Papers 0049, National Bureau of Economic Research, Inc.
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  8. Smith, David C., 2003. "Loans to Japanese borrowers," Journal of the Japanese and International Economies, Elsevier, vol. 17(3), pages 283-304, September.
  9. Miyagawa, Tsutomu & Ito, Yukiko & Harada, Nobuyuki, 2004. "The IT revolution and productivity growth in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 18(3), pages 362-389, September.
  10. Takatoshi Ito & Yuri Nagatake Sasaki, 1998. "Impacts of the Basle Capital Standard on Japanese Banks' Behavior," NBER Working Papers 6730, National Bureau of Economic Research, Inc.
  11. Diego Restuccia & Richard Rogerson, 2008. "Policy Distortions and Aggregate Productivity with Heterogeneous Plants," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 707-720, October.
  12. Alan Ahearne & Naoki Shinada, 2005. "Zombie firms and economic stagnation in Japan," International Economics and Economic Policy, Springer, vol. 2(4), pages 363-381, December.
  13. Flath, David, 2005. "The Japanese Economy," OUP Catalogue, Oxford University Press, Oxford University Press, edition 2, number 9780199278619, October.
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  15. Sekine, Toshitaka & Kobayashi, Keiichiro & Saita, Yumi, 2003. "Forbearance Lending: The Case of Japanese Firms," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, Institute for Monetary and Economic Studies, Bank of Japan, vol. 21(2), pages 69-92, August.
  16. repec:fth:osakae:505 is not listed on IDEAS
  17. David C. Smith, 2003. "Loans to Japanese borrowers," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 769, Board of Governors of the Federal Reserve System (U.S.).
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  19. Takeo Hoshi & Anil K. Kashyap, 2004. "Japan's Financial Crisis and Economic Stagnation," Journal of Economic Perspectives, American Economic Association, vol. 18(1), pages 3-26, Winter.
  20. Takeo Hoshi, 2006. "Economics Of The Living Dead," The Japanese Economic Review, Japanese Economic Association, Japanese Economic Association, vol. 57(1), pages 30-49.
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  1. Is a lost decade ahead?
    by Economic Logician in Economic Logic on 2012-07-13 13:56:00
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