What is the Nikkei 225?

The Nikkei 225 is a price-weighted index of the 225 top blue-chip Japanese equities traded on the Tokyo stock exchange. It can be considered as the Japanese equivalent to the Dow Industrials Index in the U.S. In fact, the Nikkei was previously known as the Nikkei Dow Jones Stock Average. Some of the company’s whose stocks are included in the Nikkei are Sony, Toyota, and Panasonic. The Nikkei 225 is the oldest stock index in Asia.

How can I invest in the Nikkei 225?

If you wanted to invest directly yourself in the Nikkei 225 you would need to buy equal amounts of each stock in the index, which would be prohibitively expensive for nearly every investor. Even though there is no direct way to invest in the Nikkei 225, but there are exchange traded funds that mimic closely the movements in the Nikkei 225. There are several ETFs that track the Nikkei 225 trade on the Tokyo Stock Exchange. They include Blackrock Japan’s iShares Nikkei 225 ETF, and Nomura Asset Management’s Nikkei 225 Exchange Traded Fund.

What is the best strategy for trading the Nikkei 225?

Because Japan is an export oriented economy, and the majority of its exports go to the U.S. there is a strong correlation between the U.S. equity markets and Japan’s Nikkei. In many cases the Nikkei will follow the direction set by Wall Street overnight. In addition, because the Nikkei is so export oriented it can be heavily influenced by the value of the Yen. When the Yen is stronger the Nikkei tends to sink, and when the Yen becomes weaker the Nikkei tends to gain. This is because Japanese exporters benefit from a weaker Yen when they repatriate revenue generated overseas.

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Nikkei 225 Trading

The Nikkei (Nikkei heikin kabuki) 225 also known as the Japan 225, is the stock market index for the Tokyo Stock Exchange (TSE) was first calculated in 1950 (retroactive to May 1949) and is the most widely quoted average of Japanese stocks. Today it is calculated on a daily basis by the Nihon Keizai Shimbun (Nikkei) newspaper.

The prominent nature of the index allows many profitable products to be linked to the Nikkei 225, which is an indicator of the economic situation and movement in Japan. The Nikkei, like the US’s Dow Jones, is a price-weighted index and consists of 225 large, publicly-owned Japanese companies from an array of industries. This offers investors and traders alike an outlook on investment sentiments towards Japanese equities.

Nikkei Trading information

Nikkei trading hours are Monday to Friday 23:46 – 06:24 & 07:31 – 17:54 (GMT)
The Nikkei index moves in increments of 5.00
Leverage provided
The minimum trade size is 100
The Nikkei’s currency is the Japanese Yen

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Nikkei History

Originally called the Nikkei Dow Jones Stock Average from 1975 to 1985, it was initially established as part of the rebuilding of Japan’s industrial sector following World War II. The Tokyo Stock Exchange was established in 1878, and during the Second World War, the Japanese government joined the Tokyo Stock Exchange with a few other leading companies at the time to form the Japanese Stock Exchange (JSE). Nearing the end of WWII in the latter part of August 1945 the JSE was closed down. In May of 1946, the Tokyo Stock Exchange re-opened under the aegis of the new Securities Exchange Act.

In the late 1980s, Japan experienced an economic cycle that saw a rapid increase (50%) in the Japanese yen’s value. To counteract a possible recession the government used fiscal and monetary stimuli. Land value as well as stock prices fluctuated during this time and it was recorded that during 1985-1989 these assets tripled in value, and the TSE accounted for 60% of global stock market capitalisation.

In early 1990 the bubble burst and the first in line to be affected was the JPY that fell to one-third of its value that year. Up until October 2008, the Nikkei traded below 7,000 seeing an 80% decline from it’s high in December of 1989. With the assistance of the Bank of Japan and fiscal injections provided by the government, the Nikkei rebounded between June 2012 and June 2015, but is still below the 50% high of 1989.

Index composition

The Nikkei 225 is comprised of 225 stocks that are selected from among Japan’s top-performing blue-chip companies. Based on the annual review these constituents can be changed. Once it has been decided that a company will no longer be a part of the index composition, it is deleted from the index and a new one is added following a procedure called ‘Extraordinary Replacement’. Once a year, in September a selection is conducted based on sector balance and company liquidity. The Nikkei has 6 sector categories that are consolidated from the 36 Nikkei industrial classifications.

Top 5 companies represented by Nikkei 225 and their market capitalization (USD)

Toyota Motor	172B
Sumitomo Mitsui	117B
Nippon Telegraph & Telephone	91.3B
NTT Docomo	89.6B
KDDI	72.9B

Factors that influence the overall index price

Due to its history, the Nikkei 225 index has become famous for being a most volatile traded index as it is prone to sharp market moves, plunging, rebounding and recovering. Tying the price of the Nikkei to the USD is mostly due to Japan’s exports to the United States. When trading the Nikkei 225 it is always wise to keep your eye on US Markets, as what influences the USD will most likely have a direct influence on the Nikkei. In addition to that, Nikkei 225 trading needs to run parallel to traders who follow the movements of the US markers as well as their indices.

The Nikkei index is extremely sensitive to global events, such as political unrest, war, economic and financial news as well as natural disasters. Economic benchmarks such as unemployment rate, interest rates, GDP figures and job creation are major influences, especially these changes happen in Japan and the United States. Thus it would be wise to follow the dynamics of the S&P 500 and the Dollar Index.