Rising interest rates could wipe out 'zoombie' companies in Japan

Japan's ending of negative interest rates could cause "zoombie" companies to close after a period of super loose monetary policy.

The concept of "zoombies" or zombie companies refers to businesses struggling to survive just to pay off debt. This number increased sharply after the Covid-19 period, due to the government providing a huge financial stimulus package for small and medium-sized companies.

On March 19, Japan ended negative interest rates . The interest rate is maintained around 0% by the Bank of Japan (BOJ), and further interest increases may take place. This move will cause zombie companies to face higher borrowing costs, leading to closures and increased unemployment. However, according to analysts, this is not necessarily negative.

The bankruptcy of loss-making businesses could push their workers to seek better opportunities in growing industries, said Koichi Fujishiro, senior economist at Dai-ichi Life Research Institute. This also "energizes" the economy.

According to a survey by Teikoku Databank Credit Research Company, the number of zombie companies in Japan is currently about 251,000 businesses, an increase of 30% compared to a year earlier. This is the highest level since 2011. By industry, retail has the largest number of "zoombie" companies, nearly 30%. Next is the transportation and telecommunications sector, more than 23%.

Bankruptcies are increasing across Japan, as they have to repay loans under the government's pandemic relief program and high raw material prices and labor costs.

According to another credit research firm, Tokyo Shoko Research, the number of corporations going bankrupt in 2023 has increased 35% from a year earlier, to 8,690 businesses. This is the largest increase since 1992.

The BOJ implemented strong monetary easing in 2013, aiming to end Japan's long-term deflation. Three years later, they set short-term interest rates at negative 0.1% and introduced a yield curve control program. Accordingly, long-term interest rates are kept at extremely low levels.

Such policies have made the burden of interest payments almost negligible. Meanwhile, the government facilitated refinancing of small businesses after the 2008 global financial crisis and stimulus measures during Covid-19.

Osamu Naito, head of the survey of "zombie" companies, said the current labor shortage in Japan could help offset some of the negative impact if defaults at these businesses occur. .

"We are seeing many cases where companies hire employees of bankrupt competitors, as a measure to have enough labor," he said.

Meanwhile, banks and other financial institutions will benefit from the BOJ raising interest rates. This means allowing them to increase profits by raising lending interest rates.

After the central bank's decision to increase interest rates on March 19, Japan's three largest commercial banks, MUFG Bank, Sumitomo Mitsui Banking and Mizuho Bank, also planned to raise savings interest rates.

Saisuke Sakai, senior economist at Mizuho Research & Technologies, said the BOJ's decision to change policy means the economy has grown stronger.

However, he noted that the BOJ's latest decision would be "just the first step" in a series of moves towards normalizing its monetary policy, with more interest rate hikes expected.

"The overall impact on businesses will be limited because the level of policy changes is not too radical (at the moment), but it will be more difficult for small and medium-sized companies to survive," Saisuke commented. Instead, companies can contribute to economic growth through technological innovation.

This year 131 international organizations, from 73 countries, partnered with the PRA in Washington, D.C., and its Hernando De Soto Fellow Prof. Sary Levy-Carciente to produce the 17th edition of the IPRI..
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