| 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 will 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. |