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Japan's stock markets are on a tear. Will 'zombie’ firms threaten the bull run?

Japan's stock markets have been on a stellar run since the start of 2023, repeatedly breaching 33-year highs and outperforming the rest of Asia — but there are rising concerns that "zombie" firms could cut short that rally.

What are zombie companies? 

They are businesses that are unprofitable and struggling to keep afloat. They may be able to pay for operating costs like wages, rentals, or make interest payments on debt, but they don't have excess capital to invest and grow the business, or to pay down the principle.

Japan's "zombie" problem has been around for a long time, said William Pesek, author of the book "Japanization: What the World Can Learn from Japan's Lost Decades."

It is now coming to the fore as the Bank of Japan is widely expected to raise interest rates this year — for the first time since 2007.

Raising the borrowing cost will put these zombie companies at risk of bankruptcy and bailouts, which could have a broader impact on the economy if there are job losses.

In Japan's context, the term was first used after the asset bubble and subsequent crash of the 1990s, where banks continued to support companies that would have otherwise gone bankrupt.

As of end 2023, Japan had about 250,000 companies that are technically zombie businesses, according to Pesek.

"Over the last 11 years, we've seen the number of zombies increase by about 30%," Pesek told CNBC's Martin Soong on "Squawk Box Asia" in an interview on Jan. 29.

The Covid-19 pandemic accelerated the problem of "zombification," with the number of zombie firms in Japan jumping by nearly a third between 2021 and 2022, Pesek said in a column for the Asia Times on Jan. 25.

His view is supported by market research company Teikoku Databank, which said in a November report