Japan’s Zombie Businesses

by Manshu on January 6, 2009

in Articles

When the Japanese real estate bubble burst in the late 80’s and early 90’s - there were several banks and businesses that took a big hit – but 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 - 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. 

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 –  rather than preserving capital.

So even though the businesses and banks were technically alive – in reality they were nothing more than zombies.

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