Japan Takes Action Against Spread of 'Zombie Companies'... "Let Them Fail"

More than 250,000 Zombie Companies Unable to Repay Bank Interest
Actively Encouraging M&A Instead of Subsidizing Failing Companies

The Japanese government, which has been extending the lifespan of failing companies with national subsidies, appears to be shifting its policy direction. The government has decided not to intervene in the bankruptcy and restructuring of these companies unless they cause serious damage to the Japanese economy.

According to major foreign media on the 16th (local time), senior Japanese officials who requested anonymity stated that the government intends to "let more so-called 'zombie companies'?firms unable to pay bank interest from operating profits?fail," adding that "this measure will help channel workers and investors into more productive companies amid Japan's tight labor market."

[Image source=AFP Yonhap News]

According to research firm Teikoku Databank, about 251,000 companies in Japan were classified as zombie companies last year. This is the highest number in the past decade, with most being small and medium-sized enterprises (SMEs) with fewer than 300 employees. Notably, 5,000 companies closed during the first half of this year, marking the highest figure in 10 years.

Regarding the proliferation of these zombie companies, analysis suggests that the sales growth and innovation of small manufacturers, which form the backbone of Japanese manufacturing, have reached their limits due to years of sluggish growth and population decline. Although these companies have survived for a long time with government subsidies and negative interest rates, the recent interest rate hikes?the first in 17 years?have made survival more difficult.

Yasushi Noro, president of NBC Consultants, which provides consulting services to SMEs, stated, "The Japanese SME model, which has been effective thanks to low interest rates until now, is collapsing," and added, "As interest rates rise in the future, this trend will intensify."

Sources explain that the Japanese government aims to increase productivity through active M&A (mergers and acquisitions) of zombie companies. A government official said, "The government expects change to occur through M&A rather than large-scale bankruptcies and layoffs," adding, "Allowing zombie companies to fail openly could provoke public backlash, so the process is being conducted discreetly." The Ministry of Economy, Trade and Industry of Japan responded in writing to major foreign media, stating, "We will continue to support small and medium-sized enterprises (SMEs)" and "We will closely monitor the situation to ensure that bankruptcies of zombie companies do not increase to an inappropriate level that would raise unemployment rates."