Stock indices are indicators that reflect the behavior of a country’s stock market. In Japan, the Tokyo Stock Exchange (TSE) is considered to be the largest stock marketplace. TSE is not only the biggest exchange in Asia but also the second largest platform globally in terms of market capitalization. The Nikkei 225 is the most relevant and representative index on the Tokyo Stock Exchange. In the guide below, we will explain the key features of this index and look at the major factors determining its performance and price.
Nikkei 225 Definition
The Nikkei 225 Stock Average is Japan’s most important stock index that includes the top 225 Japanese companies. It has been created and is calculated by the economic newspaper “Nihon Keizai Shimbun”, from which it derives its name “Nikkei”. It is a price-weighted index composed of the leading blue-chip companies in Japan’s key sectors.
The Nikkei 225 aims to reflect the Japanese economy and serves as a key reference for Asian and global markets. Investors and analysts closely monitor it as an indicator of Japan’s stock market and economic performance. Additionally, it is considered as one of the most influential indices globally.
Origin of Nikkei Index
The Tokyo Stock Exchange was established in 1878 as a market for trading government bonds. In the 1920s, it added shares of companies. During World War II, the TSE was merged with five other exchanges by the government, forming the Japan Stock Exchange. However, it temporarily closed from 1945, at the end of the war, until 1949, when it reopened and the Nikkei Index was launched.
In the late 1980s, Japan experienced a massive speculative bubble, with stock and land prices tripling between 1985 and 1989. On December 29, 1989, the Nikkei Index reached its all-time high of 38,957.44 points. However, the following year, it collapsed, experiencing a drop of approximately one-third of its value.
In 2008, the Nikkei saw a decline of over 80% from its all-time high, due to the financial crisis.
Between 2012 and 2015, the index partially recovered with the help of economic stimuli from the government. However, it remained around 50% below its previously reached all-time high.
Nikkei 225 Companies
The Nikkei 225 covers around 35 different sectors of the Japanese economy. The main sectors included in the index are:
- Technology. This sector holds the highest weighting in the Nikkei 225. It includes leading companies in electronics, technology, and robotics. Among them are Sony Corporation (NYSE: SONY), Canon Inc (NYSE: CAJ), Fujifilm Holdings Corp (OTC: FUJIY), and Yaskawa Electric Corp (YEC: FRA), among others.
- Transportation. It includes major Japanese automobile manufacturers and components like Toyota Motor Corp (NYSE: TM), Honda Honda Motor Co., Ltd (NYSE: HMC), Hino Motors Ltd (TSE: 7205), Isuzu Motors Limited (TSE: 7202), Mazda Motor Corp (OTC: MZDAY), Mitsubishi Motors (TSE: 7211), among others.
- Finance. It includes Japan’s major banks and financial institutions such as Chiba Bank Ltd (TSE: 8331), Shinsei Bank Ltd (TSE: 8303), Nomura Holdings Inc (TSE: 8604), Daiwa Securities Group Inc (TSE: 8601), and more.
The Nikkei 225 index is reviewed twice a year, in April and October, to evaluate which stocks should be included as components. The two key factors considered are the liquidity of the stocks (how actively they are traded) and the sector balance to achieve a balanced representation of the index’s six main industrial sectors.
Price of Nikkei 225: Key Factors
The price of the Nikkei 225 can be disproportionately affected by any changes in the stocks of these major companies. However, there are a few key factors that can strongly impact its price. They include:
- News. Regular reports on the country’s economic and political status can unexpectedly move the price in any direction.
- Exchange rates. The value of the Japanese yen, the country’s native currency, can affect stock prices depending on its supply and demand.
- Economic events. Like most indices, changes in monetary and fiscal policies have a significant impact on the Nikkei stocks.
- Earnings reports. Quarterly performance reports from companies included in the index, especially those with higher weighting such as Toyota, Sony, or financial firms, can affect the price of the Nikkei 225.
Nikkei vs TOPIX
There is another index dominating the Japanese stock market – the Tokyo Price Index, or TOPIX. The index is also a popular one, but it differs from Nikkei 225 in a few aspects.
Firstly, While Nikkei includes only 225 selected stocks, TOPIX is an index that includes all stocks listed on the Tokyo Stock Exchange.
Secondly, Nikkei is a price-weighted index, meaning it gives more importance to higher-priced stocks, such as technology companies. On the other hand, TOPIX uses a market capitalization weighting method, giving more weight to stocks with higher market value, such as stocks of financial companies.
Further, Nikkei tends to be more volatile as it is influenced by fewer stocks, unlike TOPIX, which represents the entire market, making it a broader and more stable index.
Therefore, we could say that TOPIX can be used to gain a better understanding of the overall market in Japan, while Nikkei would be useful for tracking the main market trends and relevant stocks in the country.
Investing In Nikkei 225
Foreign investors are not able to directly buy and manage Nikkei 225 stocks. However, there are two main ways in which foreign investors can gain exposure to the Nikkei 225 index:
Firstly, it can be done through exchange-traded funds (ETFs) that replicate the performance of the Nikkei 225 index. These ETFs contain a selection of stocks that closely correlate with the index, allowing investors to trade them as if they were regular stocks.
Secondly, investors trading large volumes of Nikkei 225-associated ETFs can exchange them for the stocks that replicate the index. In this way, they obtain direct exposure to the companies included in the Nikkei 225. This is a unique advantage of ETFs that enables large investors to access the underlying stocks.
To sum up, we can say that the Nikkei 225 is a widely traded index in Japan that, when properly analyzed, can be a valuable tool for investors interested specifically in the country’s leading companies.