Did the COVID-19 Pandemic Create More Zombie Firms in Japan?

Author Name Gee Hee HONG (IMF) / ITO Arata (Senior Fellow, RIETI) / NGUYEN Thi Ngoc Anh (IMF) / SAITO Yukiko (Senior Fellow (Specially Appointed), RIETI)
Creation Date/NO. August 2022 22-E-072
Research Project Geography, inter-firm network and socio-economic structural change
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The COVID-19 pandemic constituted a massive shock to the Japanese economy, as in other countries, posing a significant threat to the business continuity of firms. Bankruptcy rates remain low, partly thanks to large government support, but it is unclear whether the pandemic worsened business dynamism and generated more zombie firms in Japan. In this paper, using firm-level balance sheet and exit information, we find that firm exit rates declined in general, including firms with weak balance sheets, suggesting that the cleansing mechanism, whereby a less productive firm exits to allow for a more productive firm to enter, weakened during the pandemic. Overall firm borrowing also increased during the pandemic, with particular increases in long-term borrowing. The share of zombie firms rose especially in the manufacturing sector.