Investor Essentials Daily

The U.S. can still avoid following in Japan’s footsteps

July 10, 2023

A lot of companies have needed help in the past few years. In the midst of the pandemic, many companies were able to refinance their debt at low rates. The government gave out loans to small and medium-sized businesses that were run well prior to the pandemic.

Between the Treasury Department’s Paycheck Protection Program (“PPP”) and the Federal Reserve’s Main Street Lending Program, the U.S. specifically targeted giving companies a bridge.

With low interest rates and reserve requirements, meaning how much money banks need to keep at the Fed, banks and markets let many companies refinance debt out several years into the future.

These actions taken by the government were not normal. Giving out money loosely to keep companies alive is not something we see often. In short, drastic measures were taken to prevent mass failures across the economy.

And the worry, as we highlighted a few weeks ago, was that continued refinancing would mean a “Japanification” of the U.S., where zombie companies would keep on living and hurt creative destruction.

In Japan, banks kept companies unable to pay back debts alive by just papering the issues to avoid wider problems.

Bad businesses didn’t go away to make room for new and improved businesses. They just stayed afloat even though many of them didn’t deserve to.

The ripple effects were massive. Growth slowed and still hasn’t recovered to this day.

As we’ll talk about today, we can rest assured the U.S. financial system is working as it should, so there’s no Japanification happening.

Investor Essentials Daily:
The Monday Macro Report
Powered by Valens Research

The U.S. economy is working as it should.

Since interest rates started rising last year, we’ve started to see that creative destruction show. Companies that should have gone bankrupt have.

In fact, in June, another dozen or so companies went bankrupt (including the publicly traded ATM maker Diebold Nixdorf and aerospace supplier Incora) after seeing rising defaults since the start of the year.

It’s been the worst start to a year for bankruptcies since the end of the Great Recession. We’re even on pace to see more bankruptcies than we did during the pandemic.

It’s clear that these companies going bankrupt have just been delaying the inevitable over the past few years.

Credit rating agency Fitch proved this by studying 30 companies that delayed their maturities or took on more debt during or after the pandemic. Of the 30 companies, 24 of them either have defaulted or some other form of restructuring.

Failure was always on the horizon for these companies… it was only a matter of time.

This is vital to any good capitalist economy. You need the creative disruption that means companies that can’t pay their debts and operate go under. It allows capital to be allocated to areas with more opportunity.

Companies that are run well should benefit so they can continue to do so.

This willingness not to “save sacred cows” is what has allowed aggregate Uniform return on assets (“ROA”) in the U.S. to rise most of the past 20 years.

In 2022, ROA was just over 13% in 2022, compared to 8% levels in 2003.

This key concept of the U.S. economy is why we don’t think that ROA is about to drop massively. The economy rewards companies that are run well and punishes those who are run poorly.

It’s why even though we think we could be in a sideways market for a while, we’ll continue to look at U.S. stocks more than any other market.

The U.S. economy is healthy, like it should be, and we remain bullish on the long-term prospects of the country.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

View All

You don’t have access to the Valens Research Premium Application.

To get access to our best content including the highly regarded Conviction Long List and Market Phase Cycle macro newsletter, please contact our Client Relations Team at 630-841-0683 or email

Please fill out the fields below so that our client relations team can contact you

Or contact our Client Relationship Team at 630-841-0683