After a decade-long bull run throughout the 1980’s, the Nikkei 225 index reached an all-time high of 38,915 on December 29, 1989, the last trading day of the year.
Few could have imagined, on New Year’s Eve of 1989, that the index would be lower 34 years later. As the New Year arrived, the bubble burst.
And now, Japan’s stock markets are on a tear and closing in on that elusive 38195 high of 1989 – but there’s a catch – the Zombies are coming.
Zombie companies
Zombie firms are businesses that are unprofitable and struggling to keep afloat. They don’t have excess capital to invest and grow the business, or to pay down the loan capital.
Concerns about zombie firms are coming into focus as the Bank of Japan is tipped to raise interest rates in 2024 for the first time since 2007.
It comes as the Nikkei 225 rises to its highest point in almost 34 years
Japan’s stock markets have been on a meteoric run since the start of 2023, repeatedly breaching 33-year highs and outperforming the rest of Asia.
However, there are rising concerns that so called ‘zombie’ firms, which are unprofitable and struggling to keep afloat, could cut short that rally. The Bank of Japan is widely expected to raise interest rates this year, and that could easily tip many of these firms into bankruptcy, which could have a broader impact on the economy and stock market,
Nikkei 225 1-year chart 9th February 2024
Bankrupt businesses
Zombie firms are nothing new in Japan. They first emerged after the stock ‘bubble’ and subsequent crash of the 1990s, when banks continued to support companies that would have otherwise gone bankrupt.
The pandemic of 2020 accelerated the problem of zombie businesses, with the number of zombie firms in Japan reportedly jumping by around 33% between 2021 and 2022.
At the end of 2023, Japan reportedly had around 250,000 companies that are technically zombie businesses
Some experts argue that zombie firms are a drag on Japan’s productivity, innovation, and growth, as they occupy resources and crowd out more efficient firms. The debate on how to deal with zombie firms is ongoing and may have implications for Japan’s economic recovery and future prospects.
Others suggest that zombie firms may have a positive effect, such as preserving employment, social stability, and industrial diversity.
Surely, there is no room for inefficiently run businesses making little or no profit in any economy.
Watch out for the Zombies!