Japan is going to have to start culling its zombies sooner or later

When Haruhiko Kuroda held what would be his last press conference as Bank of Japan governor on Wednesday, he claimed success for an institution that now has a monstrously expansive portfolio of government bonds, domestic stocks and unanswered questions.

Crucially, after his decade-long adventures in the frontiers of monetary policy, we still don’t know if Kuroda helped fortify Japan for the grim work of killing zombies.

The big decision the BoJ made on Wednesday was to maintain its policy of keeping yields on 10-year Japanese government bonds within a tight range of 0.5 percentage points on either side of zero. Prior to the meeting, markets had forced the BoJ into a series of record-breaking daily bond purchases to defend the policy, putting pressure on Kuroda to widen the margin or abandon that policy altogether.

He resisted, but likely only compounded the problem for a successor expected to be appointed next month. Still, there’s no denying the sense that Kuroda may have inadvertently started a historic pivot. Traders, institutional investors and sell-side analysts expressed it in different ways, but a common conclusion is that inflationary pressures, possible wage increases and other factors are marking the end of the BoJ’s ultra-accommodative policy.

The timing may be slower than many expect, this theory goes, but the BoJ will eventually have to concede; interest rates will creep higher; Japanese companies and banks, shielded long from this reality, will have to accept that there is such a thing as a rising cost of capital and be more calculated about paying it off.

If that happens, the effects will be widespread. But the focus will surely turn to the fate of Japan’s stumbling horde of zombies – companies that are more than 10 years old and persistently unprofitable, but somehow fail to stay bankrupt and in business. The latest survey by data provider Teikoku Databank counted 188,000 of these companies in 2021 — more than the 163,000 registered in 2014, or Kuroda’s first full year in charge of the BoJ. While this figure, which equates to about 13 percent of all Japanese companies, is surprising, the majority of zombies are quite small; however, the question of how many must fail is perhaps the biggest and most fundamental facing Japan.

The survival of the zombies, it can be argued, is a multifaceted index of Japan’s economy: of its resistance to change, its reform progress, its social priorities, and its thirst for creative destruction. No single factor will decide how many will eventually be sent out, but that process too will be revealing, especially because of the huge proportion of the country’s workforce employed by small and medium-sized businesses.

Despite the appearance of creating a paradise for the undead, Kuroda, his monetary policy, and his efforts to secure an inflation rate of around 2 percent were never actually pro-zombie.

One reading from his time as governor of the BoJ was that the goal was to provide as much coverage as possible while preparing the environment for the economy to enter a distinct new phase. In it, Japan would have the resilience, momentum, and governance standards to let tougher capitalism hold sway and (although it was never openly stated) get better at allocating capital and making zombie removal more acceptable. The late Shinzo Abe presented himself as the prime minister who would take on the politics of this change, while parts of the investment and business world reluctantly participated in the project.

As Kuroda took increasingly extreme measures to reduce the true cost of risk and capital, the justifications piled up and the reforms disappointed. Low rates were supposed to prevent companies from hoarding money and inducing them to invest; Equity support was designed to shift household wealth from savings to investments. As Kuroda prepares to step down, Japanese business has more money than when he took over, as well as households.

The end of Kuroda’s time with the BoJ now seems to coincide with Japan’s forced clash with the nastier kind of capitalism: the kind that demands higher costs of debt and equity, and takes a harder line on who should stay afloat. . On a positive note, there has been a significant increase in domestic mergers and acquisitions, management buyouts, venture capital deployments and start-up proliferation under his governorship. A less optimistic view is that the zombie killing is about to begin, and Kuroda hasn’t left his country for it.

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