TY - JOUR AU - Caballero,Ricardo J. AU - Hoshi,Takeo AU - Kashyap,Anil K. TI - Zombie Lending and Depressed Restructuring in Japan JF - National Bureau of Economic Research Working Paper Series VL - No. 12129 PY - 2006 Y2 - April 2006 UR - http://www.nber.org/papers/w12129 L1 - http://www.nber.org/papers/w12129.pdf N1 - Author contact info: Ricardo J. Caballero MIT Department of Economics Room E52-373a Cambridge, MA 02142-1347 Tel: 617/253-0489 Fax: 617/253-6915 E-Mail: caball@mit.edu Takeo Hoshi School of International Relations and Pacific Stud University of California, San Diego 9500 Gilman Drive La Jolla, CA 92093-0519 Tel: 858/534-5018 Fax: 858/534-3939 E-Mail: thoshi@ucsd.edu Anil Kashyap Booth School of Business University of Chicago 5807 S. Woodlawn Avenue Chicago, IL 60637 Tel: 773/702-7260 Fax: 773/702-0458 E-Mail: anil.kashyap@chicagobooth.edu AB - 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. ER -