It's All Over for Japan (and That's Good)

Japanese stocks have rebounded to 30-year highs and became the world’s best performers in September and the third quarter.

Gains were likely aided by the end of the Olympics, the leadership of Prime Minister Suga and the delta surge in COVID-19 cases.

The performance momentum could continue with the reopening of the nation’s capital reinvigorating economic growth, the strong upward trend in revisions to analysts’ earnings estimates for Japanese companies, lower relative valuations, and a historically bullish pre-election period.


With the end of the third quarter, the Olympics, the leadership of Prime Minister Suga, and the delta surge in COVID-19 cases have also ended. This has led to a new beginning for Japan with the country’s stock market becoming the best performing in the world during September. Hitting new 30-year highs, the Nikkei 225 Index posted a gain of 9.4% over the past month (since August 27), even as the U.S.’s S&P 500 and Europe’s STOXX 600 Index both posted small losses. We believe Japan’s momentum may continue in the months ahead.

No coincidence

The end of these events and the beginning of Japan’s strong market performance wasn’t likely a coincidence:

  • The unpopular and divisive hosting of the summer Olympics has passed. Over the past 30 years, six of the eight countries that hosted the Olympics had subsequently outperformed the MSCI ACWI index in the following six months (with the two exceptions being China (Beijing) in 2008 during the beginning of the Great Financial Crisis and the UK (London) in 2012 during the European debt crisis).
  • The unpopular Prime Minister Yoshihide Suga announced that he would resign. All leading candidates have pledged to promote more fiscal stimulus, giving a likely boost to the growth outlook
  • COVID cases have retreated all the way back to pre-delta levels, alleviating a source of anxiety and need for continued restrictions, and their potentially negative economic consequences. The delta surge prompted Japan to reach sought after immunity levels (over 80% of the population getting the vaccine), despite initially lagging the U.S. in vaccination rates, limiting the likelihood for economically impactful restrictions going forward.

Japan COVID-19 cases back to pre-delta levels

Source: Charles Schwab, Bloomberg data as of 9/27/2021.


More to follow?

These economically positive developments are not the only factors driving Japan’s brighter outlook. We identified several more that may help to continue to drive solid performance for Japan’s stock market.

  • The State of Emergency will soon be lifted, reopening the nation’s capital, and invigorating economic growth. Japan’s economy is expected to accelerate to a robust 3.8% pace of growth in the fourth quarter from 1.6% in the third, according to the Bloomberg-tracked consensus of economists’ forecasts. Japan is one of the few major economies where faster economic growth is expected in 2022 compared to 2021; the U.S. and Europe are forecasted to slow.
  • Japan’s companies have the best upward earnings revisions trend of all major countries. The brighter growth outlook for Japan is showing up in analysts’ earnings estimates. There are currently 1.93 upward revisions for every downward revision, well ahead of the 1.42 in the United States. This is a sharp contrast to a year ago when analysts gave Japanese firms only 0.79 upward revisions for each downward revision and gave U.S. companies more than 2 upward revisions for each downward revision.

Japan leading in terms of upward changes to earnings estimates     

Revision data based on MSCI Japan Index, MSCI USA Index, MSCI Europe Index, MSCI World Index. Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly.
Source: Charles Schwab, Factset data as of 9/24/2021.


  • History suggests that Japanese stocks are likely to perform solidly heading into and following the elections. The selection of the new LDP leader precedes the general election, which must be held by the end of November according to the Japanese Constitution. Looking back at elections over the past 20 years, Japan’s stock market posted a 6% gain on average in the six weeks leading up to the election (the only exception being 2000s “tech wreck” bear market). Following those elections, stocks posted solid gains on average over the following 6 months, as you can see in the table below.

Japan’s stock market performance around elections

Performance of Nikkei 225 Index in JPY
Source: Charles Schwab, Factset data as of 9/24/2021. Past performance is no guarantee of future results.


Performance of Nikkei 225 Index in JPY. 
Source: Charles Schwab, Factset data as of 9/24/2021. Past performance is no guarantee of future results.


  • Valuations for Japan’s stocks are much lower than peers on an absolute and relative basis. While price-to-earnings ratios for the U.S. and other markets around the world remain near 10-year highs, potentially limiting gains, Japan’s stocks are priced near average historical levels.

Japan’s stocks trade at more attractive valuations

Forward price-to-earnings ratios are based on next twelve months earnings estimates.
Source: Charles Schwab, Factset data as of 9/24/2021.


Supplying risk

A risk to the positive outlook for Japan is the global supply chain disruptions. Chip shortages are resulting in significant cuts in auto production—a key product for Japan. The Purchasing Managers’ Index (PMI) component for supplier delivery times worsened in September to 38, for the PMI flash estimate.  Although not as bad as in the US at 17, any reading below 50 indicates lengthening delivery times. However, thanks to a solid global demand, production is likely to ramp up significantly in 2022 as shortages recede.

Supply chain risk

Source: Charles Schwab, Bloomberg data as of 9/24/2021.


Although Japan has had a slow start during the current economic recovery (much like its start on vaccination distribution) its economy sustains itself on world trade and manufacturing, areas we expect to see growth in coming months. At attractive valuations, Japanese stocks may be beneficiaries of this continued growth story, and worth consideration by investors.


Michelle Gibley, CFA®, Director of International Research, and Heather O’Leary, Senior Global Investment Research Analyst, contributed to this report.


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