Jan 19, 2024
Zombie Firms in Japan on Rise as BOJ Paves Way for Rate Hike
, Bloomberg News
(Bloomberg) -- One in six Japanese companies have become “zombie” firms unable to keep up with debt payments from profits alone, putting them in a vulnerable position should the central bank raise interest rates this year, as is widely expected.
The number of zombie companies hit 251,000 or 17% of the total number in the 12 months to March, jumping almost a third from the previous year, according to a report by Teikoku Databank on Friday. The number was the highest since 2011, when Japan’s economy was battered by an earthquake, tsunami and nuclear disaster, the firm said.
The surging proportion of zombie firms is partly a reflection of the fallout from the government and central bank’s large-scale financial support during the pandemic. The financial positions of these firms would likely come under more pressure if the Bank of Japan hikes interest rates for the first time since 2007.
While further rises in bankruptcies and a possible increase in unemployment would be largely unpopular outcomes, some economists argue that allowing inefficient and unprofitable firms to go bust is one of the key ways that would enable Japan to raise its growth rate.
During the pandemic policymakers pulled out all the stops to avoid a wave of bankruptcies and layoffs that would scar the economy for years. The government has provided around 2.6 million interest-free, unsecured loans worth about ¥45 trillion ($300 billion) to businesses in addition to a raft of other support measures to keep businesses afloat. Special pandemic lending programs from the BOJ at one point swelled the size of loans on the central bank’s balance sheet by around ¥100 trillion.
The BOJ meets next week and is widely expected to leave its negative interest rate untouched. Nearly 60% of surveyed economists surveyed this month view April as the most likely month for the central bank to raise the rate. Still, the prevailing view is that the BOJ won’t aggressively raise rates after that, a factor that will limit the additional pressure on struggling companies.
©2024 Bloomberg L.P.
