Japanese Firms During the Lost Two Decades

The Recovery of Zombie Firms and Entrenchment of Reputable Firms

verfasst von: Jun-ichi Nakamura

Verlag: Springer Japan

Buchreihe : SpringerBriefs in Economics

Enthalten in: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

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Why has Japan's lost decade become the lost two decades? This book attempts to provide a novel perspective on causes of stagnant productivity growth of the Japanese corporate sector during the lost two decades. Exploiting the corporate financial dataset compiled by the Development Bank of Japan, it shows empirical evidence that an excessive conservative financial policy of firms in good standing were responsible for sluggish reallocation of productive resources after the recovery of “zombie” firms. The questions taken up in the book include: How can “zombie” firms be properly identified only on the basis of financial data? Why did a majority of “zombie” firms eventually recover? Why did the productivity and profitability of the corporate sector as a whole remain low even after the recovery of “zombie” firms? Why did firms in good standing stick to an excessive conservative financial policy and seem reluctant to invest for innovation? What can be the effective prescription to revitalize these firms in good standing? Supported by both in-depth data analyses and rich anecdotal evidence, this book is highly recommended to readers who seek a convincing and comprehensive explanation of Japan's lost two decades from the financial and corporate behavioral points of view.

Inhaltsverzeichnis

Frontmatter

Chapter 1. Introduction

Abstract

Since the large-scale bubble burst at the beginning of the 1990s, the Japanese economy has been suffering from prolonged stagnation for more than 20 years, a period termed “the lost two decades.” The widely accepted “zombie” firm hypothesis cannot explain the long-lasting stagnation and sluggish factor reallocation in the corporate sector after the resolution of the non-performing loan problem. The purpose of this book is to empirically explore why the profitability of the corporate sector as a whole remained low even after the recovery of zombie firms. The main hypothesis to be tested in the following chapters is that healthy, reputable firms rather than troubled firms might be responsible for the sluggish asset reallocation effects in the 2000s as they tended to be reluctant to invest in growth opportunities in order to retain their excessively “healthy” balance sheet status (e.g., the notion of being “effectively zero-leveraged”). With hindsight, such conservative tendencies in finance and investment decision making may have impaired the long-run competitiveness of Japanese firms by undermining their innovativeness when creating new products or services.

Jun-ichi Nakamura

Chapter 2. Evolution and Recovery of Zombie Firms: Japan’s Experience

Abstract

The concept of zombie firms originally argued by Hoshi (2006) and Caballero et al. (2008) (CHK hereafter) was defined as comprising such firms that cannot survive without financial support from lenders. However, the eventual bankruptcy of zombie firms was rare in reality. In this chapter, I reexamine why most alleged zombie firms finally recovered in Japan during the lost two decades following the framework of Fukuda and Nakamura (2011) and Nakamura and Fukuda (2013). The main result of the regression analyses suggests that the more transparent accounting rules and stricter bank supervision policies introduced at the beginning of the 2000 s markedly accelerated the recovery of alleged zombie firms by downsizing in terms of employees and/or fixed assets. It was too late to carry out constructive reforms since they had exhausted the positive legacies of the past. Although cost cutting was an effective way for a troubled firm to recover, it was considered to have a substantial deflationary impact on the macroeconomy.

Jun-ichi Nakamura

Chapter 3. Sluggish Reallocation of Productive Resources After the Recovery of Zombie Firms

Abstract

This short chapter discusses a possible cause of the sluggish reallocation of productive resources after the recovery of alleged zombie firms in the early 2000s using a “within-between” decomposition analysis of aggregated ROA. The decomposition result clearly shows that reallocation effects systematically take a positive value every year until 2008, suggesting that the reallocation of assets had been proceeding in the right direction in terms of efficiency. However, in spite of the importance of the reallocation effect in the long run, it was not accelerated after the recovery of alleged zombie firms. The time series variation in the number of employees and amount of tangible fixed assets reveals that the employment and investment behavior of healthy firms was too inactive to change the resource allocation dramatically in the second half of the 2000s. The substantial increase in zero-leveraged firms in the 2000s suggests that severe restructuring by alleged zombie firms in the process of recovery incentivized healthy firms to entrench themselves in an excessively strong financial ground.

Jun-ichi Nakamura

Chapter 4. Investment Behavior of Reputable Firms After the Recovery of Zombie Firms: “Conservatism” and the “Pseudo Financial Constraint Effect”

Abstract

The sluggish job creation and investment of reputable firms are considered to have delayed structural adjustments in Japan’s corporate sector during the second stage of the lost two decades. At the same time, some healthy firms overinvested in their existing lines of business and suddenly faced difficulties owing to the substantial change in the business environment. This chapter discusses what happened to healthy firms behind these seemingly contradictory phenomena, using the concept of “conservatism,” which refers to the tendency to insist on the status of reputable firms such as a higher credit rating, zero-leverage, and non-intervention by any provider of funds. The estimation of an investment equation to test this conjecture provides evidence of what we call “pseudo financial constraint effect,” under which investment tends to be excessively restrained in essence to keep the status of zero-leverage; whereas it is excessively accelerated in a booming economy through passive responses to substantial increases in current cash flow. In general, conservatism in this sense thus decelerated the reallocation of assets after the partial exit of alleged zombie firms and undermined the competitiveness of healthy firms because of a lack of innovation.

Jun-ichi Nakamura

Chapter 5. Final Remarks

Abstract

The Japanese economy seized an opportunity to change market participants’ expectations through “Abenomics,” which included a bold monetary easing program that induced a substantial rise in stock prices and a considerable depreciation of the yen. However, the recovery of the real side of the economy is not yet complete, and it is still uncertain whether the Japanese economy can ultimately overcome secular stagnation. This chapter reviews and summarizes the main findings of the previous chapters to provide a unified view of the structural causes of and problems behind the lost two decades of the Japanese economy. In light of the supposition that the entrenchment of reputable firms under stronger market pressure in the 2000s caused the sluggishness in factor reallocation and innovation after the recovery of zombie firms, several avenues to revitalize the corporate sector in Japan are discussed.

Jun-ichi Nakamura

Titel: Japanese Firms During the Lost Two Decades
verfasst von: Jun-ichi Nakamura
Verlag: Springer Japan
Electronic ISBN: 978-4-431-55918-4
Print ISBN: 978-4-431-55916-0
DOI: https://doi.org/10.1007/978-4-431-55918-4

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Inhaltsverzeichnis

Frontmatter

Chapter 1. Introduction

Chapter 2. Evolution and Recovery of Zombie Firms: Japan’s Experience

Chapter 3. Sluggish Reallocation of Productive Resources After the Recovery of Zombie Firms

Chapter 4. Investment Behavior of Reputable Firms After the Recovery of Zombie Firms: “Conservatism” and the “Pseudo Financial Constraint Effect”

Chapter 5. Final Remarks

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