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Large Japanese banks often engaged in sham loan restructurings that kept creditflowing to otherwise insolvent borrowers (which we call zombies). We examinethe implications of suppressing the normal competitive process whereby thezombies would shed workers and lose market share. The congestion createdby the zombies reduces the profits for healthy firms, which discourages theirentry and investment. We confirm that zombie-dominated industries exhibitmore depressed job creation and destruction, and lower productivity. We presentfirm-level regressions showing that the increase in zombies depressed theinvestment and employment growth of non-zombies and widened the productivitygap between zombies and non-zombies. (JEL G21, G32, L25)