The stock market index for the Tokyo Stock Exchange
The stock market index for the Tokyo Stock Exchange
The Nikkei Index, also commonly referred to as the Nikkei 225, is the most respected index of Japanese stocks. It comprises Japan’s top 225 blue chip companies that are traded on the Tokyo Stock Exchange. The Nikkei Index is roughly the equivalent of the Dow Jones Industrial Average and is considered an important measure of the Japanese stock market and the performance of the Japanese economy.
Nikkei derives its name from the Japan’s leading newspaper, Nihon Keizai Shinbun, also known as the Nikkei or Japan Economic Daily. The Nihon Keizai Shinbun newspaper began calculating and publishing the Nikkei Index in 1950. The newspaper is the equivalent of the Wall Street Journal that also calculates indices for the Dow Jones Industrial Average (DJIA).
Some of the global companies listed on the Nikkei Index include Sony Corporation, Canon Inc., Toyota Motor Corporation, Nissan Motor Corporation, Mazda Motor Corporation and Panasonic Corporation. The index comprises companies from 36 different industries, with the leading sectors being technology (42.28%), financials (3.77%), consumer goods (21.52%), transportation and utilities (3.17%), capital goods/others (12.8%) and materials (15.46%) as of 2013. Unlike other indices whose stocks are ranked by market capitalization, the constituent stocks in Nikkei Index are listed by share price. The stock valuations are denominated in Japanese Yen, and its components are reviewed once each year in September.
The Nikkei 225 index is the oldest stock index in Asia, as it started on September 7, 1950 (retroactively to May 1949). In 1943, the Japanese government combined the Tokyo Stock Exchange (established in 1878) with five other exchange markets to form a single Japanese Stock Exchange. However, the exchange closed towards the end of the Second World War and the Tokyo Stock Exchange re-opened four years later in May 1949, under the new Securities Exchange Act.
The Japanese economy suffered from the asset bubble of the late 1980’s as the government implemented measures to counter a 50% currency appreciation during the first part of the decade. As a result, the Nikkei average hit an all-time high of 38,957.44 in December 1989, before closing at 38,915.87. Stock prices grew threefold between 1985 to 1989, and the Tokyo Stock Exchange accounted for 60% of the global market capitalization in 1990. The asset bubble burst in early 1990, and the Nikkei Index declined by 67% that year. In March 2009, the average closed at 7,054.98, 81.9% below its December 1989 high. The index regained ground with support from the Japanese government and the Bank of Japan’s economic stimulus program. In 2015, the index reached the 20,000 mark, having gained over 10,000 points in just two years.
The Nikkei index does not allow individual foreign investors to buy and manage stocks directly. However, investors can obtain exposure to the index by buying stocks through exchange-traded funds whose components correlate to the Nikkei Index. Exchange-traded Funds (ETF) comprise a basket of stocks or other securities. ETFs trade throughout the day and are prone to price fluctuations just like stocks.
Investors use ETFs for speculative trading strategies like trading on margin and short-selling. Investors can trade the entire market as though they are trading a single stock. In creating a diversified portfolio, ETFs allow investors to meet specific asset allocation needs such as an allocation of 80% and 20% for stocks and bonds, respectively. Tax-aware investors can also take advantage of ETFs to reduce tax implications. The unique structure of ETFs allows investors trading large volumes of ETFs to redeem them for shares of stocks that the ETF track.
The only dollar-denominated ETF that tracks the Nikkei 225 is the MAXIS 225 Index ETF. The ETF was introduced in 2011, and it is the least complicated and most direct way for individual investors to invest in the Nikkei 225. MAXIS Nikkei 225 lists more than $87 million in assets under management. The MAXIS ETF trades on the New York Stock Exchange (NYSE) electronic trading platform, ARCA. The MAXIS Nikkei 225’s price was 17.91 as at close of March 11, 2017.
Apart from the dollar-denominated ETF, there are various ETFs that track the Nikkei 225 and the are traded on the Tokyo Stock Exchange. They include the Daiwa Asset Management ETF, Nomura Asset Management’s Nikkei 225 ETF and the Blackrock Japan’s iShares Nikkei 225 ETF. Individual investors planning to trade these ETFs must first open an account with a brokerage firm that offers international trading accounts. The account allows investors to buy and sell assets that are not listed on the NYSE. Some of the reputable brokerage firms that allow international trading include E-Trade Financial Corporation and Fidelity Investments.
When investing in Japanese ETFs, foreign investors are exposed to currency risk since these ETFs are denominated in yen. Any price fluctuations in the exchange rate between the yen and the dollar potentially subjects investors to losses. For example, if the U.S. dollar gains in value against the yen, an unhedged ETF will suffer currency losses which reduces any gains made in the Tokyo Stock Exchange.
There are several financial products based on the Nikkei 225 that are traded on stock exchanges around the world. These products include options, ETFs, futures, and warrants. The Nikkei 225 futures are now an internationally recognized futures index. Nikkei 225 futures were introduced in the Singapore Exchange in 1986, the Osaka Securities Exchange in 1988, and the Chicago Mercantile Exchange in 1990. The futures contracts allow investors to speculate whether the price of the underlying asset, the Nikkei 225 index, will rise or decline. Countries such as the United Kingdom, the United States, France, Switzerland, Italy, and Germany all have ETFs that track the Nikkei Index.
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