2009 Reports

The Contribution of Bank Lending to the Long-Term Stagnation in Japan

Peek, Joe

While it is well established that bank lending to severely impaired (zombie) Japanese
firms during the 1990s was detrimental to the Japanese economy, bank lending to troubled, but
economically viable, firms may have had beneficial effects. The objective of this study is to
investigate the consequences of increased bank lending to distressed Japanese firms in order to
determine the extent to which those increased loans contributed to the recovery of distressed
firms, rather than being used to insulate the firms from market forces in order to avoid the
painful, but needed, restructuring. That is, is increased lending to a distressed firm associated
with an improvement in the subsequent performance of the firm?