When the Japanese real estate bubble burst in the late 80’s and early 90’s -Â there were several banks and businesses that took a big hit – butÂ were considered too big to fail.
Throughout the 90’s and the early part of this century, these banks and businesses were flushed with funds by the Japanese government -Â and kept on artificial life support. They were neither dead nor alive, and that gave birth to the term – Zombie Businesses.
Since economic activity was depressed – there was a genuine lack of solid businesses that could borrow from the bank and then repay the money.Â
Because of this – Japanese banks started depositing their money with competing banks or funded businesses – that had little chance of succeeding. This was done to show a semblance of activity and avoid bankruptcy.
Such an environment created an incentive for banks to loan out funds to risky businesses – that had little chance of repaying them – Â rather than preserving capital.
So even though the businesses and banks were technically alive – in reality theyÂ were nothing more than zombies.