Zombies on the Brink: Evidence from Japan on the Reversal of Monetary Policy Effectiveness

By Gee Hee Hong, Deniz O Igan, Dongyeol Lee

February 19, 2021

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Gee Hee Hong, Deniz O Igan, and Dongyeol Lee. Zombies on the Brink: Evidence from Japan on the Reversal of Monetary Policy Effectiveness, (USA: International Monetary Fund, 2021) accessed December 30, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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 bank-firm 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.

Subject: Currencies, Debt reduction, Financial statements, Unconventional monetary policies, Yield curve

Keywords: Capital structure, Corporate balance sheet, Corporate investment, Coverage ratio, Firm level, Quantitative easing, Reversal rate, Term premium, Transmission of unconventional monetary policy, WP, Zombie firm, Zombie firms

Publication Details

Pages:

41
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2021/044
Stock No:

WPIEA2021044
ISBN:

9781513570037
ISSN:

1018-5941

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