The Bank of Japan's first rate hike in 17 years may set the stage for tackling a perceived negative legacy of its ultraloose monetary policy that has allowed many unprofitable "zombie" companies to stay afloat, potentially creating room for more economic growth.

The coronavirus pandemic, in particular, pushed up the number of such zombie firms -- companies barely surviving despite being unable to cover debt-serving costs with profits -- amid the government's massive financial stimulus to small and medium-sized companies.

While the BOJ made clear that the accommodative financial conditions will be maintained "for the time being," despite deciding to end its negative interest rate policy on Tuesday, further rate hikes could prompt the downfall of zombie firms in the face of higher borrowing costs.

Photo taken on Jan. 23, 2024, shows the Bank of Japan headquarters in Tokyo. (Kyodo) ==Kyodo

But an increase in bankruptcies, which may result in a rise in unemployment, will not necessarily be unfavorable, analysts said.

It could "invigorate" the economy, as bankruptcies of unprofitable businesses may prompt their workers to seek better opportunities in growing industries, said Koichi Fujishiro, senior economist at the Dai-ichi Life Research Institute.

According to a survey by credit research firm Teikoku Databank Ltd., the number of zombie firms for the year that ended March 2023 increased to an estimated 251,000, up about 30 percent from a year earlier and the highest level since fiscal 2011.

By industry, the retail sector had the biggest number of zombie firms, accounting for 27.7 percent of such companies, followed by the transportation and telecom sector, which stood at 23.4 percent.

Bankruptcies have already been increasing across Japan, as the repayment of loans provided under the government's pandemic relief program, rises in prices of materials and increasing labor costs have weighed on companies.

According to another credit research firm, Tokyo Shoko Research Ltd., the number of corporations that went bankrupt in 2023 rose 35.2 percent from a year earlier to 8,690, the biggest rate of increase since 1992 after the bursting of Japan's asset-inflated economy.

The BOJ embarked on powerful monetary easing in 2013, aimed at putting an end to Japan's chronic deflation. In 2016, the bank set short-term interest rates at minus 0.1 percent and introduced a yield curve control program, under which long-term interest rates have been kept at extremely low levels.

Such policies have made the burden of interest payment almost negligible while the government made refinancing for smaller firms easier following the 2008 global financial crisis and offered massive stimulus during the pandemic that accelerated from 2020.

Osamu Naito, who led the survey on zombie firms, said the current labor shortage in Japan could help offset some of the adverse impacts of possible insolvencies.

"We are seeing more cases where firms hire employees of rival firms that went bankrupt as a means to secure an adequate workforce," he said.

Banks and other financial institutions, meanwhile, stand to benefit from the BOJ's rate hikes, enabling them to increase profitability by lifting rates on loans.

Following the central bank's decision on Tuesday, Japan's three biggest commercial banks -- MUFG Bank, Sumitomo Mitsui Banking Corp. and Mizuho Bank -- are planning to offer better rates on savings accounts, which, if realized, will be the first such hike since 2007.

Saisuke Sakai, a senior economist at Mizuho Research & Technologies Ltd., said, "The fact that the BOJ has decided to change its policy means that the economy has indeed grown stronger."

But he noted that the BOJ's latest decision will "just be the first step" in a series of moves toward normalizing its monetary policy, with more interest rate hikes expected to come.

"While the overall impact on businesses will be limited as the extent of the policy change is not so radical (at the moment), it will become more difficult for small and medium-sized companies to survive," he said.

The head of Japan's biggest business lobby, Masakazu Tokura, declared an end to what he called "a cozy era," during which the BOJ's unorthodox monetary easing policy served merely as "a shot in the arm," urging companies to contribute to economic growth through technology innovation.

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