This paper examines the role of misdirected bank lending in prolonging Japan's macroeconomic stagnation following the asset price collapse in the early 1990s. The authors argue that Japanese banks continued to lend to insolvent firms, known as "zombies," despite the firms' inability to repay loans. This practice, called "ever-greening," allowed zombies to persist in the economy, distorting competition and reducing the entry and investment of healthy firms. The presence of zombies led to depressed job creation and destruction, lower productivity, and a widening productivity gap between zombies and non-zombies. The authors identify zombies using a measure based on subsidized credit, which includes interest rate concessions, debt-equity swaps, and debt forgiveness. They find that the prevalence of zombies increased sharply in the mid-1990s, with over 25% of firms classified as zombies by 1994. The zombie problem was more severe in non-manufacturing sectors, where firms faced higher levels of financial distress. The authors develop a model to analyze the effects of zombies on restructuring. The model shows that the presence of zombies reduces the natural surge in destruction that would occur in response to negative shocks, leading to slower job creation and a "sclerosis" in the economy. The model also highlights the congestion caused by zombies, which reduces the profits and collateral of healthy firms, discouraging their entry and investment. The authors find that the prevalence of zombies is associated with lower levels of aggregate restructuring, with job creation being especially depressed in sectors with the most zombie firms. They also find that the prevalence of zombies lowers productivity, with the gap in productivity between zombies and non-zombies increasing as the percentage of zombies rises. The authors conclude that the zombie problem in Japan was a major factor in the prolonged stagnation of the economy, and that the misallocation of credit by banks played a central role in this outcome. The paper provides a detailed analysis of the mechanisms through which zombies distorted competition and reduced economic growth in Japan.This paper examines the role of misdirected bank lending in prolonging Japan's macroeconomic stagnation following the asset price collapse in the early 1990s. The authors argue that Japanese banks continued to lend to insolvent firms, known as "zombies," despite the firms' inability to repay loans. This practice, called "ever-greening," allowed zombies to persist in the economy, distorting competition and reducing the entry and investment of healthy firms. The presence of zombies led to depressed job creation and destruction, lower productivity, and a widening productivity gap between zombies and non-zombies. The authors identify zombies using a measure based on subsidized credit, which includes interest rate concessions, debt-equity swaps, and debt forgiveness. They find that the prevalence of zombies increased sharply in the mid-1990s, with over 25% of firms classified as zombies by 1994. The zombie problem was more severe in non-manufacturing sectors, where firms faced higher levels of financial distress. The authors develop a model to analyze the effects of zombies on restructuring. The model shows that the presence of zombies reduces the natural surge in destruction that would occur in response to negative shocks, leading to slower job creation and a "sclerosis" in the economy. The model also highlights the congestion caused by zombies, which reduces the profits and collateral of healthy firms, discouraging their entry and investment. The authors find that the prevalence of zombies is associated with lower levels of aggregate restructuring, with job creation being especially depressed in sectors with the most zombie firms. They also find that the prevalence of zombies lowers productivity, with the gap in productivity between zombies and non-zombies increasing as the percentage of zombies rises. The authors conclude that the zombie problem in Japan was a major factor in the prolonged stagnation of the economy, and that the misallocation of credit by banks played a central role in this outcome. The paper provides a detailed analysis of the mechanisms through which zombies distorted competition and reduced economic growth in Japan.