The Bank of Japan’s loan programs to help businesses ride out the recession run the risk of creating more "zombie" companies if they are kept in place for too long, analysts warn.
The central bank loan measures, worth more than ¥100 trillion, have so far fueled a record jump in lending that has kept firms afloat during the nation’s worst economic slump.
The challenge for policy makers is to turn off the tap before an apparently successful lifeline of support for otherwise healthy firms turns into an addictive supply of cash for habitual loss-makers.
While countries around the world face potential side effects from unprecedented steps to prop up companies hit by the pandemic, Japan is particularly vulnerable — given that the potential for the economy to grow with a shrinking population and low productivity is already close to zero. It also has past experience of enabling inefficient firms to survive on life support.
"The longer the support goes on the greater the risk that zombie firms will be allowed to live for longer,” said economist Yuichi Kodama at Meiji Yasuda Research Institute. "Once the economy starts recovering, what used to be good policy can become overkill.”
The term "zombie company” was coined during the nation’s so-called lost decade in the 1990s, when banks’ continued support for unprofitable businesses crowded out investment in healthier firms. The legacy of that lives on, with the nation’s labor productivity ranked 21st among the members of the Organization for Economic Cooperation and Development, according to the Japan Productivity Center.
The BOJ has already extended the lending facilities for six months until March, and it may have to do so again given that the economy remains fragile and the pandemic shows little sign of abating, said Hiroaki Muto, an economist at Sumitomo Life Insurance Co. "A history of Japan’s economic policy shows that it’s hard to end a policy once you started,” he said.
Banks have about ¥35 trillion ($330 billion) in outstanding loans stemming from the emergency programs, which the central bank introduced in March. Government credit guarantees have also fueled the surge in lending.
"In the short term, the government and the Bank of Japan should support businesses, and they’re doing a good job,” said Rie Nishihara, a banking analyst at JPMorgan Chase & Co. "But after a year or so, they need to think about what to do next.”
BOJ Gov. Haruhiko Kuroda has downplayed concerns about the emergence of zombie companies. The central bank will exit from the lending programs once demand for them fades, he said at a news briefing in July. Given the gradual pace of economic recovery, the BOJ must continue to support corporate funding for a long time, he said.
Already, the total lent under the facilities is more than four times the amount the BOJ deployed under the "monster operation,” a measure introduced in January 2009 to support companies during the global financial crisis.
One reason is that the central bank is giving banks an incentive to use the new programs by effectively paying them 0.1 percent interest on the amount lent.
"They go beyond the monster operation,” Satoshi Osanai, a senior researcher at Daiwa Institute of Research, said of the latest effort. "It shows how actively banks are tapping them.”
Much of the jump in bank loans has ended up in deposits, which grew a record 8.8 percent in August from a year earlier, suggesting companies are squirreling away the extra credit in case the downturn is prolonged. Bank deposits exceeded loans by an unprecedented ¥289 trillion last month, equivalent to the annual economic output of France, BOJ figures showed Tuesday.
Paying banks to lend marks a change for the BOJ, whose negative interest-rate policy introduced in 2016 was intended to jolt lending by charging financial institutions on some of their reserves. Banks have long complained that the measure eroded loan profitability and should be scrapped.
According to Daiwa’s Osanai, continuing the latest BOJ and government stimulus for too long could raise the risk of moral hazard, in which unnecessary loans are extended under lax standards with little concern for losses incurred if they sour.
Thanks to the flood of lending, the nation has avoided a surge in business failures even as the economy shrank a record 28.1 percent in the second quarter. The number of bankruptcies fell 1.6 percent from a year earlier to 789 in July, according to Tokyo Shoko Research Ltd. That’s the fifth lowest for that month in the past 30 years.
Japan’s focus on providing loans to small and midsize businesses contrasts with the U.S., where much of the aid has gone to larger companies through the Federal Reserve’s corporate bond purchases.
Switching from rescue mode to rekindling economic growth will be a key challenge for whoever replaces Prime Minister Shinzo Abe, who is stepping down this month. Yoshihide Suga, the favorite for the role, has pledged to maintain the central bank’s monetary easing.
"The moves by the government and BOJ were well coordinated,” JPMorgan’s Nishihara said. "The problem is how long this public support will last.”
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