Japan’s Zombie Banks Have A lesson For Us

The Japanese economy in the 1980s was enviable. At 3.89% it had the highest gross domestic product (GDP) rate in the world, followed by the United States at 3.07%. This growth could not be attributed to any external entity, it was all Japan’s doing.

It used domestic demand to strengthen its economy, unlike the last two decades where it relied on exports and foreign demand. Growth started specifically in 1986 when companies invested in private plants and consumers decided to go on a spending spree. Japan was housing a rapidly ageing population that demanded better technology for leisure and welfare. This further pushed growth and increased the confidence of investors and consumers alike in the growth of the nation.

This period of economic growth, called a ‘miracle’ by many ended in 1991 when Japan’s housing and asset price bubble burst. An economy with prospects stronger than that of the United States saw GDP growth plummet to 1.14% from 1991-2003. Land values dropped 70% by 2001.

Japan entered a period of recession that lasted for two decades called the Lost Score.
Many nations have faced financial crises before and since, but a lesson that emerged from the way the Japanese government dealt with it, reflects in the way we face our problems as people.

Back then the government created zombie banks and firms. A zombie bank is a financial institution that has zero economic value but continues to function because it is supported by the government either implicitly or explicitly. These banks have no credit worth or lending capacity of their own but can still extend loans because the government, indirectly the tax payers, acts as a guarantor and supplies money.

Zombie banks, in turn, promote the growth of zombie firms. These companies only have so much money that they can pay off the interest for the loans they borrow, but never the principal amount.

The Japanese government and its central bank adopted this unique approach because they were living in denial. These bodies assumed, and hoped, that by lending money to banks and companies they could kick start their economy and crawl out of the slump. However, it only drove them down further.

What Japan could have done instead is taken a few steps backs and analysed the situation. Instead of running away from the loss it could have accepted the mess and then started to clean it. Since it refused to believe that it was in a dire situation, it couldn’t help itself.

That is exactly what we need to understand too. Sometimes things get so messy and murky that to just shrug at them will not drive the troubles away. Instead, it will give them an opportunity to grow. Every so often we all need to take a few steps back and try to get some perspective on where we stand, and especially spot these zombies. They are all empty inside and will rot whatever else they touch. They give a sense of sustenance and growth that is only a bubble waiting to burst.

Had Japan acted differently and not created zombie banks, it could’ve recovered faster. Recessions are inevitable, but denial isn’t all that helpful either.

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Devika Soni
Devika Soni