Japan’s stock rally has a zombie problem

TOKYO — There’s no shortage of reasons to worry “irrational exuberance” is coursing through Japan’s stock market.

They include the high odds Japan entered 2024 in recession, fallout from China’s economic slowdown, reforms failing to keep pace with investor enthusiasm and a dearth of confidence at Bank of Japan headquarters that the economy is ready to live without quantitative easing (QE).

Now there’s a new reason to worry Nikkei 225 bulls have gotten ahead of themselves: zombies.

The last 11 years of so-called “Abenomics” were supposed to be a golden era for Japan Inc retooling. In December 2012, Shinzo Abe grabbed the premiership pledging to cut bureaucracy, modernize labor markets, rekindle innovation, launch a startup boom, empower women and restore Tokyo’s place as Asia’s top money center.

Yet a new report by research company Teikoku Databank suggests Abe’s real legacy was growing the ranks of the corporate walking dead. The number of zombies, or companies that are unprofitable but not seeking liquidation, jumped about 30% to an 11-year high of roughly 250,000, or 17% of the total number of unsound companies.

Surely, the pandemic played a role in the zombification. The number of zombie firms jumped by nearly a third between 2021 and 2022. But the important point is that so many companies were barely breathing even before Covid-19 hit.

For Japan, the pandemic crystallized Warren Buffett’s famous observation that “only when the tide goes out do you discover who’s been swimming naked.” Covid had that effect, exposing an unhealthy amount of skinny dipping among Japan’s corporate chieftains.

What helped keep the tide from going out year after year was the BOJ’s epic liquidity programs, especially on Abe’s watch. In March