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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. Masayuki Nakakuki & Akira Otani & Shigenori Shiratsuka, 2004. "Distortions in Factor Markets and Structural Adjustments in the Economy," Hi-Stat Discussion Paper Series d04-26, Institute of Economic Research, Hitotsubashi University.
  2. 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, vol. 21(2), pages 69-92, August.
  3. Joe Peek & Eric S. Rosengren, 2005. "Unnatural Selection: Perverse Incentives and the Misallocation of Credit in Japan," American Economic Review, American Economic Association, vol. 95(4), pages 1144-1166, September.
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  5. Ogawa, K. & Kitasaka, S.-I., 2000. "Bank Lending in Japan: its Determinants and Macroeconomic Implications," ISER Discussion Paper 0505, Institute of Social and Economic Research, Osaka University.
  6. 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.
  7. Diego Restuccia & Richard Rogerson, 2007. "Policy Distortions and Aggregate Productivity with Heterogeneous Plants," Working Papers tecipa-283, University of Toronto, Department of Economics.
  8. Bernanke, Ben & Bohn, Henning & Reiss, Peter C., 1988. "Alternative non-nested specification tests of time-series investment models," Journal of Econometrics, Elsevier, vol. 37(3), pages 293-326, March.
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  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. David C. Smith, 2003. "Loans to Japanese borrowers," International Finance Discussion Papers 769, Board of Governors of the Federal Reserve System (U.S.).
  14. Se-Jik Kim, 2004. "Macro Effects of Corporate Restructuring in Japan," IMF Staff Papers, Palgrave Macmillan, vol. 51(3), pages 457-492, November.
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  19. Xu Yi & Nezih Guner & Gustavo Ventura, 2004. "Macroeconomic Implications of Restrictions on Size," 2004 Meeting Papers 879, Society for Economic Dynamics.
  20. repec:fth:osakae:505 is not listed on IDEAS
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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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