After three decades of ultraloose monetary policy, even small hikes in interest rates by the Bank of Japan are poised to fuel an increase in the number of zombie companies that could be tipped into insolvency.
Bankruptcies topped 5,000 cases for the first time in a decade between April and September, a report by Tokyo Shoko Research showed earlier this month. Those 5,095 firms collectively account for almost ¥1.38 trillion ($9.2 billion) in debt, with the largest slice coming from the service industry.
Defined as businesses that struggle to pay the interest on debt from operating profit alone, zombie companies have survived for years in Japan thanks to low rates and government support. Unable to invest or hire, they’re stifling the emergence of new enterprises and preventing job mobility. Clearing them out may not be such a bad thing, and make way for new, healthier enterprises, according to Nicholas Smith, strategist at CLSA Securities Japan.
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