What is the Nikkei 225 Stock Index?

The Nikkei 225, also known simply as "Nikkei," is the leading equities index for the Tokyo Stock Exchange (TSE), a subsidiary of the Japan Exchange Group (JPX). It is a weighted-average index consisting of 225 of the top publicly traded common stocks in Japan. Commonly viewed as a barometer of Japanese economic health, the Nikkei 225 is often compared to the United States' Dow Jones Industrial Average (DJIA), Hong Kong's Hang Seng Index (HSI), or the FTSE 100 in the United Kingdom.

History

The origins of the Nikkei can be traced back to the late 1940s and the post-World War II era. Seeking a way to measure the strength of Japanese industry and corporate development during WWII reconstruction, a financial reader known as the Nihon Keizai Shimbun (Nikkei) began calculating the Nikkei 225. Upon its official launch date of 7 September 1950,^[1] the Nikkei began its journey to becoming one of the most respected equities metrics in all of the Asia-Pacific region.

The timing of the Nikkei's launch proved to be optimal. Post-war Japan experienced explosive economic growth due to enhanced cooperation between the government and private industry. For the period 1950 to 1973, Japan's gross national product (GNP) grew by an average of 10% annually. The robust performance garnered the attention of international equities investors, fueling a rapid expansion of Nikkei.

From 1950-1973, valuations rose more than 50-fold,^[3], which set the stage for Japan's bull market of the 1980s. The growth of the Nikkei 225 peaked in 1989 with its all-time high value of 38,915.^[4]

After the bull market of the 1980s subsided, Japan experienced a period of recession and economic contraction. Currency instabilities plagued the Japanese yen (JPY) as well as the equities markets. A mere eleven years after reaching its lofty peaks, the Nikkei plunged under 10,000 by the turn of the 21st century. Aside from sporadic short-lived rallies, values stayed beneath 10,000 until 2012 and the election of new Prime Minister Shinzo Abe.^[3]

The election of Shinzo Abe injected fresh stimulus to Japan's equities markets. Promoting an economic policy known as "Abenomics," Abe aspired to restore the Nikkei to its historical standing. Featuring flat-to-negative lending rates from the Bank of Japan (BoJ), Abenomics aimed at boosting output in the all-important export sector.

Since Abe's taking office in December of 2012, the Nikkei has exhibited strong growth. From December of 2012 to August of 2018, values have rallied from just above 10,000 to over 22,000.^[3] The rise in the Nikkei is frequently attributed to the policies of Abenomics, as well as Japan's GDP rising to £4.18 trillion, ranking fifth globally.

Nikkei Calculation And Composition

The Nikkei 225 is denominated in JPY. It is calculated by dividing the aggregate par value of all constituents by a flexible divisor. The divisor smooths the index's derivation and closely adheres to the same methodology as used in the DJIA.^[6] Thus, the process of using the divisor is commonly referred to as the "DOW adjustment."^[7]

The TSE serves as Japan's premier stock market and features more than 3,500 individual corporate listings in six different classifications. TSE listings are grouped according to their respective market capitalisation and size.

As of July 2018, TSE stocks were categorised in the following order:^[8]

In the spirit of selecting only the upper crust of large-cap publicly traded companies in Japan, the Nikkei 225 is comprised exclusively of 1st Section domestic common stocks. In order for a company to be listed in the 1st Section and eligible for the Nikkei, several requirements must be satisfied:^[9]

The corporate stocks that make up the Nikkei are reviewed at the beginning of each October.^[9] In the event that a company no longer meets the criteria to be considered a 1st Section stock, it is removed from the index and replaced with a more suitable candidate.

Primary Sectors And Companies

Featuring a market capitalisation of £2.93 trillion,^[10] the TSE ranks among the world's elite formalised stock exchanges.

The Nikkei 225 is an accurate measure of this strength. By implementing a proportional representation of companies from six distinct sectors, the Nikkei provides investors with a cross section of Japan's stock offerings:^[7]

The top ten corporations included in the Nikkei account for more than 30% of the entire index value. Below is a short list of these companies and their assigned weight as of year-end 2017:^[7]

The sectoral breakdown of the Nikkei shows that technology is a key component of the index. With more than 44% of the aggregate value and six of the top ten companies rooted in tech, the Nikkei heavily depends on technological innovation.

Summary

As a top five global economy, Japan is a premier financial power in the Asia-Pacific region.

The JPX and TSE figure heavily into that equation, ranking among the world's elite stock exchanges in terms of market capitalisation. In turn, international traders and investors alike view the Nikkei 225 as a litmus test for the health of the entire Japanese economy.