The owner of a car repair business in northwest Tokyo has been digging into his retirement fund to keep his shop going. He’s in his mid-60s, he’s not making money and he knows he’ll eventually have to close down.

But for now, he’s managing to keep hold of his single remaining mechanic by deferring his loan repayments time after time.

The man said the garage was started by his father after the war and at one time boasted about 20 employees. He asked not to be identified, citing the risk to his reputation if customers knew the state of his business. It’s just one of tens of thousands of fading small companies subsisting using easy refinancing terms that have lingered in Japan since the financial crisis.

“I’m grateful for that,” the owner said in front of his cramped garage. “The customers keep coming, even though there aren’t many of them, so we can’t give up. I’m happy we can carry on.”

While Prime Minister Shinzo Abe touts Japan’s sliding rate of bankruptcies as an economic success, critics point to the side effects of propping up “zombie” firms, such as excess competition leading to downward pressure on prices, which have fallen short of the central bank’s 2 percent inflation target. And with many industries suffering from a worsening labor shortage, Japan can’t afford to have workers languishing in dying businesses.

“This is one reason why prices don’t rise and deflation continues,” said Toru Fujimori of corporate credit research company Teikoku Databank. “It’s unfair competition. They are not only failing to repay the principal, but also the interest. They don’t pay taxes. On the other hand, healthier companies are paying principal, interest and taxes while competing on prices.”

Fujimori defines zombie companies as those that are unable to pay back their loans, and have been insolvent and made losses for three straight years.

The issue isn’t exclusive to Japan, but the nation’s business startup and closure rate is about 5 percent, roughly a third of that in other advanced nations, according to the Organisation for Economic Co-operation and Development. This is despite the Abe administration’s pledges to remedy the situation.

The government set a target in 2013 to increase the turnover rate to 10 percent, and last year stated that to achieve this would require a change in how society views the issue.

“If they actually tried to introduce stricter rules on financing, they would be criticized in parliament,” said former trade ministry official Hiroyuki Kishi, now a professor at Keio University. “They say the right things, but when it comes to actually doing them, of course no politician wants to see businesses in their own constituency go under. So they push for subsidies and favorable financing.”

Part of the problem dates back to the aftermath of the global economic crisis. Then-Financial Services Minister Shizuka Kamei pushed through a law in 2009 that forced financial institutions to respond as flexibly as possible to requests from small businesses for the rescheduling of loans. Even after the law expired, the agency continued to press banks to continue with the policy.

“I brainwashed them to reverse their thinking” and focus on reviving companies rather than wringing interest payments out of them, Kamei said in an interview last month. “I think it saved hundreds of thousands of small and medium-sized enterprises.”

About 70 percent of Japanese workers are employed by such small firms, whose definition varies by industry sector. While the easy refinancing policy has probably helped keep Japan’s unemployment on a downward trend since 2009, two-thirds of the nation’s companies don’t make enough profit to pay taxes.

The OECD blames government backing such as loan guarantees for keeping nonviable enterprises afloat. “Such support distorts resource allocation and limits access to finance by viable companies, thereby reducing Japan’s potential growth,” it said in a report in April last year.

The number of bankruptcies in Japan has fallen for seven straight years, reaching 8,164 in 2016, according to Teikoku Databank, down from more than 13,000 in 2009. If the number of nonviable enterprises staying in business are counted, there could be as many as 35,000, Fujimori said. That’s even as 25,000 businesses folded voluntarily in 2016.

“I’m seeing more company managers who are tired out and no longer even have the energy to put together a business plan,” said business consultant Masahiro Seno. “They can reschedule loans if they simply show how they are going to cut costs.”

The easy loan policy has damaged lending expertise at financial institutions, according to Masashirou Ootomo, assistant director of the research and consulting center at Chugoku Bank, based in the city of Okayama.

“In the past, we nurtured a sense of how to judge the strength of a business, not just by looking at the figures, and that was passed down,” Ootomo said.

The FSA said in a report last year it was concerned about the possibility of side effects from an excessively mechanical approach to financing decisions introduced in a bid to eliminate bad debt. The agency declined a request for comment on this story.

Kamei, the former minister, said all policies have side effects, and urged empathy for businessmen like the car repair shop owner.

“These guys are doing their best,” he said. “They are trying to manage their businesses in such a way as to repay their debts. If it’s impossible — that can’t be helped.”

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