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Nikkei 225 Index (Japan)

A stock market index is a measurement of a portion of the stock market. It is calculated from the prices of selected stocks (often a weighted average). It is a tool used by financial managers and investors to describe the market, and to compare the return on specific investments. Below you will find an interactive chart of the Nikkei 225 index. What is the Nikkei 225 index?

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What is the Nikkei 225 index?

The Nikkei 225 Index (NI225), otherwise known as the Nikkei, is a price-weighted index that is made up of the 225 largest blue-chip Japanese companies on the Tokyo Stock Exchange. The index is similar to the Dow Jones Industrial Average (DJIA) in that it is weighted by price rather than by market capitalization. The Nikkei is regarded as an indicator of the health of the Japanese economy. The Nikkei is the oldest stock index in Asia.

Introduction

Like the New York Stock Exchange (NYSE) or NASDAQ in the United States, many of the major countries that impact the global economy have their own stock exchanges. In Japan, that would be the Tokyo Stock Exchange (TSE). And, like the Dow and S&P 500 indexes in the U.S., the TSE has the Nikkei 225 Index. For nearly 70 years, the Nikkei as it is frequently called has provided investors with a broad indicator of the Japanese economy. In this article, we’ll take an in-depth look at the Nikkei index and provide investors with suggestions for how they can invest in the index.

What is the Nikkei 225 index?     

The Nikkei index is a price-weighted (as opposed to market-cap-weighted index) that tracks the performance of Japan’s top 225 blue-chip companies. Because it is price-weighted it is the Japanese equivalent to the DJIA in the United States.

Just as the editors of the Wall Street Journal select the Dow components, the “Nihon Keizai Shimbun” or Japan Economic Newspaper (colloquially referred to as Nikkei) sponsors the calculation of the Nikkei index. Some of the best-known companies that are part of the index include Canon Incorporated, Sony Corporation, Toyota Motor Corporation, and Honda Motors.

History of the Nikkei

As the Second World War raged on in 1943, the TSE was combined with five other exchanges to create a single Japanese Stock Exchange. However, as the war was winding down in 1945, that exchange closed down. The TSE re-opened in 1949 as part of the just-passed Securities Exchange Act.

In 1950, the Nikkei was established as part of the rebuilding and industrialization of the country. The ranking of the individual companies is done by share price rather than by market capitalization. Valuations are denominated in Japanese yen. The composition of the Nikkei comes under review every September. Any changes to the index take place in October.

Like any stock index, the Nikkei has not been immune to asset bubbles. When the Japanese government created an asset bubble in the 1980s, stock prices and land values skyrocketed. In fact, between 1985 and 1989, these assets tripled in value. When the bubble was at its peak, the TSE accounted for 60% of global stock market capitalization.

Once the bubble burst, the Nikkei index dropped by one-third and by October of 2008, the Nikkei was trading at levels that were 80% below its high in December 1989. As of November 7, 2019, the Nikkei is trading at 23,300.32, which puts the index within 10% of its all-time high.

 What sectors are represented in the Nikkei Index?

When looking at the sectors that are represented in the Nikkei index, it is important to remember that it is a price-weighted index. The index weightings, therefore, do not represent the actual sector market value of the Japanese stock market. Here are the sectors presented in alphabetical order. The telecommunications sector was dropped from the index in 2019.

  • Communications – This sector has only been on the index since 2018. It currently makes up about 10.28% of the index.
  • Consumer Discretionary – This sector has remained very consistent, making up approximately one-fifth of the index. In 2019, it makes up 21.13%
  • Consumer Staples – Like the consumer discretionary category, this is a very stable category that has been around one-tenth of the index over the last six years. It is currently at 10.07%.
  • Energy – The energy sector is one of the sectors that carry the least weight. It currently has a weighting of 0.38%
  • Financials – This is an area of the index that has declined in percentage terms. In 2014, this sector was over 6% of the index. Today, it is down to 2.42%.
  • Health Care – The health care sector has been consistently around 10% of the index for the last six years. In 2019, it comprises 10.63% that is down from 11.36% in 2018.
  • Industrials – Like the consumer discretionary sector, the industrial sector traditionally comprises about one-fifth of the index. In 2019 this sector has a weighting of 20.38%.
  • Information Technology – This sector is consistently around 15% of the weighting for the Nikkei. In 2019, it is at 15.69%.
  • Materials - This sector has historically represented less than 10% of the overall index. In 2019, the components in this sector made up 6.60% of the index.
  • Utilities – This is the smallest sector in the index. In 2019, the components in this sector made up 0.21% of the index.
  • Real Estate – Like the communications sector, this is a new addition. In fact, 2019 is the first year this sector is part of the Nikkei. Its components make up 2.21% of the index.

How can investors invest in the Nikkei index?

Just as in the United States, it isn’t possible for an investor to directly invest in the Nikkei. However, there are several exchange-traded funds (ETFs) that are composed of companies that correlate to the Nikkei. Some examples of ETFs that trade on the Tokyo Stock Exchange include Blackrock Japan’s iShares Nikkei 225 and the Nomura Asset Management’s Nikkei 225 Exchange Traded Fund. Investors who wish to stay on the New York Stock Exchange can choose the Maxis Nikkei 225 Index ETF

The final word on the Nikkei 225 index

The Nikkei index is one of the most established and respected international stock exchanges. Like the DJIA in the United States, it is a price-weighted index that makes it different from many other indexes which are weighted according to market capitalization. The consumer discretionary and the industrials sector make up approximately 40% of the index. 

 

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