BOJ's Unplanned War on Japan's Zombie Companies
BOJ's interest rate hike may trigger a tsunami of destruction for Japan's zombie companies and a catastrophic unemployment crisis, but it's a necessary sacrifice to prevent a financial Armageddon
At the december 2022 monetary policy meeting, the Bank of Japan (BOJ) revised its large-scale easing and decided to raise the maximum interest rate on 10-year government bonds from 0.25% to 0.5%.
This might not sound all that shocking, considering that the US Federal Reserve raised their rate by 50bps to 4.25%-4.5% the same month. However, it's a seismic shift that shakes the very foundation of Japan's economy after the world's longest period of 0% interest rate.
The reason for this unprecedented announcement is market pressure from foreign investors. As Western countries fell into inflation that far surpassed that of Japan, foreign investors, including institutional investors, began selling Japanese 10-year bonds, whose interest rates were depressed after years of quantitative easing from the BOJ.
However, raising interest rates is much harder for the BOJ than its western counterparts. On December 2, 2022, Hitoshi Asada, a council member asked, "If the interest rate rises by as much as 1%, how much will the BOJ's holdings of bonds lose on valuation?" In response, Deputy Governor Masayoshi Amemiya responded, "Around 28.6 trillion yen ($221 billion) in valuation losses."
This is money that the BOJ, nor the Japanese government have, which will result in them having to borrow from foreign entities at increasingly high interest rates.
The BOJ is well-aware of this predicament, but might have no choice. The Japanese consumer price index rose 3.7% in November compared to the same month last year. This is the highest level in about 41 years and will only be exacerbated with the current 0% interest rate. Couple this with the sinking attractiveness of Japanese 10-year bonds and doing nothing could lead to a disaster.
However, there is an issue that scares the BOJ even more…
BOJ Interest Rate hike is a potential catastrophe for Zombie companies
If you want to know more about Japanese zombie companies, I’ve written an article about the topic here:
Simply put, zombie companies are businesses whose sole purpose is to survive, often through subsidized loans from the government, and they contribute nothing to society except stable employment.
As the zombie companies stagger on, unable to make a profit, they are unable to invest in their own workforce. The employees of these zombie companies are left to wither, without the training and development they need to evolve and thrive in the job market. Instead, they often become trapped as "Zombie employees", doomed to spend the entirety of their working lives in these dying companies, unable to escape and find new opportunities.
Currently, only about 35% of companies in Japan pay corporate tax. That means that the remaining 65% don't pay a dime in corporate taxes, and hence are free-riding on Japan’s infrastructure and zero-interest environment while not contributing at all!
So, if the BOJ is serious about the future of this country, they need to raise interest rates.
The scary thing is how easy it would be to weed-out these zombie companies: There are reports that a measly 0.25% interest rate hike would bankrupt over one fifth of all zombie companies. That’s a lot of unemployed people the BOJ and the Japanese government would have to answer for.
Kill the Zombies!
I argue that an even higher interest rate hike than 0.25% to create a serious weeding out of Japanese zombie companies may be the only way forward. But make no mistake, this path would come with a heavy cost.
Unemployment rates in Japan could skyrocket to levels not seen since the beginning of the post-war period, and with so many zombie employees forced to leave the only work they can do, the unemployment rate could permanently double or even triple from its current 2.8%.
However, the writing is on the wall: Japan's economy is in dire straits. The government's attempts to downplay the crisis and restrict the flow of information have only served to delay the inevitable. The time for action is now!
It is time for Japan to face reality head-on and take bold, decisive steps to address this crisis, even if it means short-term pain for long-term gain. Only by ridding the economy of these deadweight zombie companies can Japan hope to achieve true financial stability and prosperity in the long run.
The future of the Japanese economy depends on it, and I have a feeling that deep-down, the BOJ knows it too...