Zombies on the brink: Evidence from Japan on the reversal of monetary policy effectiveness

BIS Working Papers  |  No 987  | 
11 January 2022



For more than a decade, many central banks have engaged in unconventional monetary policy. How do these actions affect economic activity, including through firms' investment decisions?


This paper offers a corporate finance perspective on the effects and limitations of unconventional monetary policy. The analysis uses detailed data on Japanese banks and firms between 2004 and 2015. This is an interesting case because the Bank of Japan has a longer history of unconventional monetary policy than other major central banks. Noting that unconventional monetary policy affects the yield curve, the paper uses lower term premia as proxy for monetary easing. The granularity of the data allows the effect of the term premia to be identified through fixed effects. It also reveals differences in the investment patterns of financially vulnerable firms (the so-called zombies) and healthier firms.


Firms increase investment in response to lower term premia. But this response comes primarily from healthy firms. By contrast, zombies seem to respond to monetary easing by financial restructuring. They basically replace short-term debt with long-term debt. That way, they take advantage of lower long-term yields without increasing investment. Unconventional monetary policy might have a diminishing effect on firm investment in an economy with many zombies.


How does unconventional monetary policy affect corporate capital structure and investment decisions? We study the transmission channel of quantitative easing and its potential diminishing returns on investment from a corporate finance perspective. Using a rich bankfirm matched data of Japanese firms with information on corporate debt and investment, we study how firms adjust their capital structure in response to the changes in term premia. Investment responds positively to a reduction in the term premium on average. However, there is a significant degree of cross-sectional variation in firm response: healthier firms increase capital spending and cash holdings, while financially vulnerable firms take advantage of lower long-term yields to refinance without increasing investment.

JEL classification: E2, E5, G3.

Keywords: transmission of unconventional monetary policy, quantitative easing, reversal rate, zombie firms, corporate balance sheet, term premium, corporate investment.