This chapter investigates the connection and interaction between two types of firms: zombie firms, which have excessive debt and cannot survive without support from financial institutions, and zero-leverage firms, which have no borrowing or hold cash and deposits more than interest-bearing liabilities. The existence of both of these firms represents a distinct feature of the Japanese financial system since the 1990s. The authors first report the evolution of the ratio of zombie and zero-leverage firms to all Japanese firms. They then examine the impact of zombie firms on non-zombie firms and the relationship between zombie firms and effectively zero-leverage firms. The empirical analysis reveals that zombie firms often have a negative impact on the real economic activities of non-zombie firms and that non-zombie firms in industries with a high proportion of zombie firms tend to become effectively zero-leverage. While previous studies have examined the externalities of zombie firms, this chapter is the first to examine the effect of the zombie firms on zero-leverage firms. Based on the recent experience that government support programs during the COVID-19 pandemic focused on small- and medium-sized enterprises, the discussant Tsuruta points out that future research should examine the effect of unlisted zombie firms on non-zombie firms and the government’s efficient support in the presence of the negative externalities of zombie firms.