What is Nikkei?

The Nikkei is short for Japan’s Nikkei 225 Stock Average, the leading and most respected index of Japanese stocks. It is a price-weighted index composed of the 225 main Japanese companies listed on the Tokyo Stock Exchange. The Nikkei is equivalent to the Dow Jones Industrial Average in the United States.

Understanding Nikkei

Formerly called Nikkei Dow Jones Stock Average (from 1975 to 1985), it now bears the name of the “Nihon Keizai Shimbun” or Japan Economic Newspaper, commonly called Nikkei, which sponsors the calculation of the index. The index has been calculated since September 1950, with retroactive effect to May 1949. Among the best-known companies included in the Nikkei index are Canon Incorporated, Sony Corporation and Toyota Motor Corporation. It is the oldest stock market index in Asia.

The Nikkei was created as part of the reconstruction and industrialization of Japan in the aftermath of the Second World War. Constituent stocks are ranked by share price rather than by market capitalization as is common in most indices. Valuations are denominated in Japanese yen. The composition of the Nikkei is revised in September and any necessary changes take place in October.

Nikkei background

The Tokyo Stock Exchange was established in 1878. In 1943, during World War II, the Japanese government combined the TSE with five others to form a single Japanese stock exchange. This exchange was closed in August 1945 towards the end of the war. The Tokyo Stock Exchange reopened on May 16, 1949, under the aegis of the new Securities Exchange Act.

Japan experienced a major asset bubble in the late 1980s when the government used fiscal and monetary stimuli to counter a recession caused by the 50% appreciation of the Japanese yen during the first part of the decade. According to TraderHQ, stock prices and land values ​​tripled between 1985 and 1989; at the height of the bubble, the TSE represented 60% of the world market capitalization.

The bubble burst in 1990 and the value of the Nikkei index dropped by a third that year. According to Seeking Alpha, in October 2008, the Nikkei was trading below 7,000; this is a drop of more than 80% from the peak in December 1989. It then rebounded between June 2020 and June 2020 thanks to the economic recovery of the Japanese government and the Bank of Japan, but the index was still close to 50% lower than the 1989 high.

Investing in the Nikkei index

It is not possible to buy an index directly, but there are several exchange traded funds (ETFs) whose components are correlated with the Nikkei. ETFs that follow the Nikkei and trade on the Tokyo Stock Exchange include the iShares Nikkei 225 from Blackrock Japan and the Nikkei 225 Exchange Traded Fund from Nomura Asset Management. The MAXIS Nikkei 225 Index ETF is a dollar-denominated fund that trades on the New York Stock Exchange.

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