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Zombie firms and economic stagnation in Japan


It is often claimed that one contributing factor to Japan's weak economic performance over the past decade is that Japanese banks have continued to provide financial support for highly inefficient, debt-ridden companies, commonly referred to as ‘zombie’ firms. Such poor banking practices in turn prevent more productive companies from gaining market share, strangling a potentially important source of productivity gains for the overall economy. To explore further the zombie-firm hypothesis, we use industry- and firm-level Japanese data and find evidence that productivity growth is low in industries reputed to have heavy concentrations of zombie firms. We also find that the reallocation of market share is going in the wrong direction in these industries, adding to already weak productivity performance. In addition, we find evidence that financial support from Japanese banks may have played a role in sustaining this perverse reallocation of market share.

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  1. See, for example, Caballero et al. (2003), Caballero and Kashyap (2002), The Economist (2004), Feldman (2002), and Lincoln (2001).

  2. Previous studies include Caballero et al. (2003) and Peek and Rosengren (2003).

  3. The results in Table 1 are based on a standard framework for growth-accounting analysis, where labor productivity growth is measured as the difference between the growth of output and the growth of the number of hours worked. Multifactor productivity growth is measured as the difference between output growth and total input growth. This measure, also known as the Solow residual, reflects the influence of technological change not already embodied in new capital. This residual also reflects measurement errors and cyclical factors not captured elsewhere. Total input growth is measured as a weighted average of labor hours growth and capital growth. The weight for labor is this factor's income share; one minus the share of labor is the weight of capital. Finally, we decompose the growth of labor productivity into the growth of multifactor productivity and the contribution of capital deepening.

  4. This effort to shorten the traditionally long Japanese workweek included a gradual reduction in the statutory workweek from 6 to 5 workdays per week beginning in 1988. In addition, the number of national holidays was increased by 3 during this period. See Hayashi and Prescott (2002) for more details.

  5. Kawamoto (2004) shows evidence that the slowdown in multifactor productivity in Japan in the 1990s largely reflects lower cyclical utilization of capital and labor and reallocation of inputs rather than a change in the rate of technical progress.

  6. See Porter et al. (2000) and Katz (1998) for extensive discussions of possible reasons why some Japanese industries are highly competitive, while other industries exhibit very poor productivity growth.

  7. See also Davis and Haltiwanger (1999) and Haltiwanger (2000).

  8. In particular, our dataset contains only two firms in the real estate industry. Presumably, many Japanese real estate firms are not listed on Japanese stock exchanges and are therefore not included in the Development Bank of Japan's Corporate Finance Database. In addition, we suspect that several listed firms that are involved in real estate are included in our dataset under the ‘construction’ or ‘other construction’ groupings. Both these industry groupings are included in our sample.

  9. We note that the Bank of Japan and Japan's Ministry of Finance both also use the factor incomes method to calculate their statistics on corporate performance.

  10. Because we use a balanced panel of firms for our analysis, we do not include exit and entry terms in our decomposition. In part, our decision to use a balanced panel reflects the difficulty of interpreting firm ‘entry’ in a dataset of listed firms. For example, many firms operate for considerable periods of time prior to being listed on a stock exchange. In addition, there are technical reasons associated with our method for computing firms' real capital stocks that render the use of an unbalanced panel highly problematic.

  11. These results are consistent with the findings in Nishimura et al. (2005) that efficient firms exited the Japanese economy while inefficient ones survived during the banking crisis of 1996–1997.

  12. See Ahearne et al. (2002) for a review of Japanese fiscal policy during the 1990s.


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We are grateful to Partick McGuire and participants in the Tokyo and Ann Arbor conferences for helpful comments. All errors remain ours. The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Development Bank of Japan, the Board of Governors of the Federal Reserve System or any other person associated with the Federal Reserve System.

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Correspondence to Alan G. Ahearne.

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Ahearne, A.G., Shinada, N. Zombie firms and economic stagnation in Japan. IEEP 2, 363–381 (2005).

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  • Productivity
  • Banking system
  • Creative destruction