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Zombie Lending and Depressed Restructuring in Japan

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

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12129.

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Date of creation: Apr 2006
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Publication status: 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.
Handle: RePEc:nbr:nberwo:12129
Note: EFG CF ME
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  1. Ricardo J. Caballero & Mohamad L. Hammour, 1998. "The Macroeconomics of Specificity," Journal of Political Economy, University of Chicago Press, vol. 106(4), pages 724-767, August.
  2. Ito, Takatoshi & Sasaki, Yuri Nagataki, 2002. "Impacts of the Basle Capital Standard on Japanese Banks' Behavior," Journal of the Japanese and International Economies, Elsevier, vol. 16(3), pages 372-397, September.
  3. Nakakuki, Masayuki & Otani, Akira & Shiratsuka, Shigenori, 2004. "Distortions in Factor Markets and Structural Adjustments in the Economy," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 22(2), pages 71-99, May.
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  6. Flath, David, 2000. "The Japanese Economy," OUP Catalogue, Oxford University Press, number 9780198775034, March.
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  8. 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.
  9. 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.
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  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 G. Ahearne & Naoki Shinada, 2005. "Zombie Firms and Economic Stagnation in Japan," Hi-Stat Discussion Paper Series d05-95, Institute of Economic Research, Hitotsubashi University.
  13. Takeo Hoshi & Anil Kashyap, 2004. "Corporate Financing and Governance in Japan: The Road to the Future," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262582481, June.
  14. Takeo Hoshi, 2006. "Economics Of The Living Dead," The Japanese Economic Review, Japanese Economic Association, vol. 57(1), pages 30-49.
  15. 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.
  16. Xu Yi & Nezih Guner & Gustavo Ventura, 2004. "Macroeconomic Implications of Restrictions on Size," 2004 Meeting Papers 879, Society for Economic Dynamics.
  17. Yasushi Hamao & Jianping Mei & Yexiao Xu, 2007. "Unique Symptoms of Japanese Stagnation: An Equity Market Perspective," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(4), pages 901-923, 06.
  18. David C. Smith, 2003. "Loans to Japanese borrowers," International Finance Discussion Papers 769, Board of Governors of the Federal Reserve System (U.S.).
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  20. 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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