The Nikkei 225 Index (N225), 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 Nikkei index trades between the hours of 9:00 a.m. to 11:30 a.m. and 12:30 p.m. to 3:00 p.m. local time in Japan.
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. 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.
A History of the Nikkei 225 Index
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.
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 is the Methodology Behind 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.
What Sectors are Represented in the Nikkei 225 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 as of December 2019. The telecommunications sector was dropped from the index in 2019.
- Technology – As you might expect, the technology sector is far and away the most heavily weighted of all the sectors. As of December 2019, the technology sector carried 45.73% of the index’s weighting.
- Consumer Goods – This is the second largest sector by weight. This sector carried about 24.5% of the index’s weighting as of December 2019.
- Materials - This sector has historically represented less than 10% of the overall index. However, in 2019, the components in this sector made up 14.11% of the index.
- Capital Goods - This sector carried the fourth heaviest market cap weighting with 10.87%.
- Financials – This is an area of the index that has declined in percentage terms. In 2014, this sector was over 6% of the index. In 2019, it was the smallest weighted component at 2.21%.
- Transportation/Utilities – This is traditionally one of the smallest sectors in the index. In 2019, the components in this sector made up 2.57% of the index.
How Can Investors Trade Stocks Found on the Nikkei 225 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) who 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.
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 which makes it different from many other indexes which are weighted according to market capitalization. As of December 2019, the technology and consumer goods sectors comprised about 70% of the index.