Certified public accountant Kishida Yasuo (岸田康雄) explains the nature of the zombie companies that eroded Japan’s economy and the distortions in resource allocation that contributed to its prolonged stagnation.
After the bubble burst in the 1990s, Japan’s economy entered a prolonged period of stagnation. It has been pointed out that capital and human resources failed to flow to companies with strong growth potential, while zombie companies that should have exited the market continued to survive. This situation is said to have contributed to declining productivity and slower economic renewal across the country.
Zombie companies are companies that cannot repay their debts on their own and, despite being in a position where they should exit the market, continue to survive with support from financial institutions. Banks provided support through low-interest loans, debt forgiveness, rescheduling and debt-equity swaps.
The Basel regulations formed part of the backdrop to banks’ continued support. It has been explained that banks needed to maintain their capital adequacy ratios by postponing the resolution of troubled loans. In response, measures such as Forbearance and Evergreening were used.
The presence of zombie companies hindered the flow of funds and human resources to companies with strong growth prospects. The impact was particularly significant in industries driven by domestic demand, such as construction, real estate, services and retail, although manufacturing was also affected to some extent. The view has been expressed that creative destruction came to a halt and distortions in resource allocation deepened.