The real answer is that Japan’s banks kept rolling over bad loans to weak borrowers. As this paper by Joe Peek and Eric Rosengreen shows, during the nineteen-nineties, Japanese banks constantly “evergreened”—they kept extending additional credit to companies that already had loans with them. By extending credit, the banks enabled weak corporate borrowers to keep making their interest payments, and to put off bankruptcy.Bankruptcy is an underappreciated but necessary component of a market economy.
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