Introduction

Abstract

Since the large-scale bubble burst at the beginning of the 1990s, the Japanese economy has been suffering from prolonged stagnation for more than 20 years, a period termed “the lost two decades.” The widely accepted “zombie” firm hypothesis cannot explain the long-lasting stagnation and sluggish factor reallocation in the corporate sector after the resolution of the non-performing loan problem. The purpose of this book is to empirically explore why the profitability of the corporate sector as a whole remained low even after the recovery of zombie firms. The main hypothesis to be tested in the following chapters is that healthy, reputable firms rather than troubled firms might be responsible for the sluggish asset reallocation effects in the 2000s as they tended to be reluctant to invest in growth opportunities in order to retain their excessively “healthy” balance sheet status (e.g., the notion of being “effectively zero-leveraged”). With hindsight, such conservative tendencies in finance and investment decision making may have impaired the long-run competitiveness of Japanese firms by undermining their innovativeness when creating new products or services.

Any opinions, findings, or conclusions expressed in this chapter are those of the author and do not reflect the views of the Development Bank of Japan.