Forbearance lending as a crisis management tool: evidence from Japan

Credit market interventions have become a widespread policy tool deployed by governments around the world to support their corporate sectors following shocks like the global financial crisis and the pandemic. Among those policies, forbearance programmes allowed firms to temporarily stop making payments on certain debt obligations or obtain debt forgiveness. However, the impact of these policies is not fully understood. In particular, forbearance lending is generally believed to keep unviable firms alive and contribute to the zombification of the corporate sector. To inform this debate, we examine the effects of Japan’s small and medium-sized enterprise (SME) Financing Facilitation Act, which encouraged banks to offer loan forbearance to troubled SMEs. We develop a framework to quantify the aggregate impact of the policy using a difference-in-differences approach combined with back‑of‑the‑envelope counterfactual exercises. Our evaluation indicates that, when coupled with business restructuring plans, forbearance lending can temporarily boost output without contributing to the widespread zombification of the corporate sector. Forbearance is more effective when credit market disruptions impede the reallocation of capital.