Zombie Lending and Depressed Restructuring in Japan

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 cre...

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Bibliographic Details
Published in:The American economic review 2008-12, Vol.98 (5), p.1943-1977
Main Authors: Caballero, Ricardo J., Hoshi, Takeo, Kashyap, Anil K.
Format: Article
Language:English
Subjects:
Bank credit
Bank loans
Bank operations
Banking industry
Banks
Borrowing
Collateral
Competition
Credit market
Employment
Financial economics
Incumbents
Industrial productivity
Insolvency
Interest rates
International relations
Investments
Japan
Job creation
Life insurance
Loans
Market shares
Productivity
Real estate industry
Securities prices
Studies
Zombies
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Summary: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.
ISSN:0002-8282
1944-7981
DOI:10.1257/aer.98.5.1943