The Nikkei 225, often simply referred to as the Nikkei, is Japan’s leading and most celebrated index of blue-chip stocks. This price-weighted index is composed of the top 225 companies traded on the Tokyo Stock Exchange, serving as the Japanese counterpart to the Dow Jones Industrial Average (DJIA) in the United States.
Key Highlights
- Leading Stock Index: The Nikkei represents Japan’s top 225 blue-chip stocks.
- Price-Weighted Index: The index averages the share prices of all its listed companies.
- Prominent Companies: Sony Corporation, Canon Inc., Nissan Motor Company, and Honda Motor Company are some of the well-known companies in the Nikkei.
- Alternative Index: The Tokyo Price Index (TOPIX) provides another measure, focusing on a capitalization-weighted approach.
Delving Deep into the Nikkei
Formerly known as the Nikkei Dow Jones Stock Average between 1975 to 1985, today it is named after the Nihon Keizai Shimbun (Japan Economic Newspaper), commonly referred to as Nikkei, which is responsible for its calculation. The index has been calculated since September 1950, backdated to May 1949. Canon Inc., Sony Corporation, and Toyota Motor Corporation are among its most notable constituents, making the Nikkei the oldest stock index in Asia.
The Nikkei was established in the wake of the Second World War as Japan strove for economic reindustrialization. Unlike most indexes that rank companies by market capitalization, the Nikkei ranks them by share price. These values are denominated in Japanese yen, with the index being recalibrated each September and changes taking effect in October. Remarkably, the Nikkei 225 is recalculated every five seconds during the Tokyo Stock Exchange’s hours of operation.
The Tokyo Stock Exchange and the Nikkei Index History
The Tokyo Stock Exchange (TSE), founded in 1878, initially functioned as a bond exchange for government-issued bonds to samurai, and soon expanded to include gold and silver currency trading. By the 1920s, it ventured into stock trading. During the Second World War in 1943, the TSE merged with five other exchanges under government directive, forming the unified Japanese Stock Exchange, which was eventually shut down in August 1945.
Reopened on May 16, 1949, under the Securities Exchange Act, the TSE saw Japan encountering a significant asset bubble in the late 1980s. This was instigated by fiscal and monetary stimuli counteractive measures due to severe appreciation of the Japanese yen earlier in the decade. Between 1985 and 1989, stock prices and land values tripled, briefly accounting for 60% of global stock market capitalization.
However, with the burst of the bubble in 1990, the Nikkei Index dropped by one-third within that year. By October 2008, it plunged below 7,000, marking an 80% fall from its December 1989 zenith. Thanks to government and Bank of Japan interventions, recovery ensued between June 2012 and June 2015, although the index remained at nearly half its 1989 peak.
TOPIX vs. Nikkei: A Comparative Perspective
The Tokyo Price Index (TOPIX) serves as another popular index within the Tokyo Stock Exchange. While the Nikkei encompasses 225 selected stocks, TOPIX includes all first-section stocks—companies with large market valuations like financials, thanks to its capitalization-weighted approach.
Investment Considerations
Directly investing in an index isn’t possible, but exchange-traded funds (ETFs) that mimic the Nikkei components make great alternatives. Examples include Blackrock’s iShares Nikkei 225 and Nomura Asset Management Nikkei 225 ETF on the Tokyo Stock Exchange. Additionally, the MAXIS Nikkei 225 Index ETF offers a dollar-denominated option available on the New York Stock Exchange.
Embark on your investment journey with a profound understanding of Japan’s premier stock index, and leverage the Nikkei today!
Related Terms: TOPIX, DJIA, price-weighted index, capitalization-weighted index, economic stimulus.
