Working Paper: NBER ID: w12129
Authors: Ricardo J. Caballero; Takeo Hoshi; Anil K. Kashyap
Abstract: 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.
Keywords: Zombie Lending; Japan; Banking; Economic Stagnation
JEL Codes: E44; G34; L16; O53
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| zombie lending (G21) | reduction in profits for healthy firms (L21) |
| reduction in profits for healthy firms (D21) | discouragement of entry and investment (F21) |
| increase in zombie firms (L26) | depresses investment and employment growth of non-zombie firms (E22) |
| zombified industries (L52) | more depressed job creation and destruction (J63) |
| zombified industries (L52) | lower productivity (O49) |
| distortions caused by zombie firms (F12) | significant decrease in investment (G31) |