What is Nikkei 225? Invest in Japanese stocks with a long-standing index

Get to Know Nikkei 225 - The World’s Important Japanese Stock Index

Nikkei 225 is a stock index that tracks the overall movement of the Japanese stock market, comprising 225 leading companies listed on the Tokyo Stock Exchange, such as Hitachi, Fujitsu, Panasonic, Sharp, and Toyota.

If you are familiar with Thailand’s SET50, it might help you understand the concept more easily, as both are indices composed of top companies from various industries to serve as indicators of economic stability.

History of Nikkei 225 - The Oldest Index in Asia

Nikkei 225 has been in operation for 72 years since September 7, 2493 BE. It is the oldest stock index in Asia. The calculation of Nikkei dates back to May 16, 2492 BE, when the Japanese stock market was newly launched after World War II.

Since 2513 BE, the Nihon Keizai Shimbun (The Nikkei) newspaper has been responsible for managing and reporting the daily index values.

Performance of Nikkei 225 Throughout History

The movement of Nikkei 225 from its inception to the present reflects global economic fluctuations:

• Peak: 38,916 points at the end of December 2532 during Japan’s stock market bubble
• Trough: 7,568 points at the end of February 2552 after the subprime crisis
• Current: As of December 17, 2568, the index stands at 49,512.28 points, up 0.26% or 128.99 points

This month, the index reached a high of 49,571.50 points and a low of 49,077.81 points, reflecting buying momentum and market volatility in Japan.

How is Nikkei 225 Calculated - Price-Weighted Index System

Nikkei 225 uses a price-weighted index system, updated every 5 seconds during trading hours.

Calculation formula:

Adjusted stock price = stock price × Price Adjustment Factor (PAF)

Index value = Sum of adjusted stock prices ÷ Divisor (Divisor)

Price Adjustment Factor (PAF)

The Price Adjustment Factor has been officially used since October 2021 to adjust stock prices for structural consistency.

Before that, Nikkei used a “presumed par value” system, adjusting stock prices to a nominal value of 50 yen, even though Japan officially abolished the par value system in October 2001.

The reason for adjusting stock prices is that Japanese stocks still vary significantly in price levels: some are traded as 1 share, others in lots of 100 or 1,000 shares, making direct index calculation inappropriate. PAF helps improve accuracy, flexibility, and standardization in calculations.

Criteria for Selecting Stocks for the Nikkei 225 Index

Maintaining Nikkei 225 as a good representative of the Japanese stock market considers two main criteria:

1. Periodic Review (Periodic Review)

Conducted twice a year in January and July, effective in April and October respectively.

During this review:

• Stocks with low liquidity are removed
• Stocks with high liquidity are added as replacements

Liquidity is assessed based on:

• Total trading volume
• Stock price volatility

2. Emergency Replacement (Extraordinary Replacement)

Occurs when stocks are delisted from the stock exchange due to:

• Mergers
• Business restructuring
• Moving to another exchange

New stocks added must be from the same industry as the removed stocks to maintain industry sector proportions.

Composition of Nikkei 225 - Industry Distribution

Nikkei 225 includes stocks from 36 industries, grouped into 6 major categories as of the latest data on December 18, 2568:

Sector proportions:

Technology - 52.03% (Pharmaceuticals, Electrical Machinery, Automobiles and Parts, Precision Instruments, Communications)

Consumer Goods - 22.36% (Food, Fisheries, Retail, Services)

Materials - 12.69% (Mining, Textiles and Apparel, Chemicals, Paper, Petroleum, Rubber, Glass, Ceramics, Steel, Metal Products)

Capital Goods & Others - 8.46% (Construction, Machinery, Shipbuilding, Real Estate)

Financials - 2.39% (Banking, Financial Services, Securities, Insurance)

Transportation & Utilities - 1.56% (Railways, Land Transport, Water, Air, Warehousing, Energy)

It is clear that technology stocks constitute nearly half of the index, making them a primary driver of Nikkei 225’s movements.

Factors Driving Nikkei 225 Prices

1. Global Economic Conditions

Japan is an export-oriented country, so trading partner economies directly impact its stock market:

• Number 1: United States
• Number 2: China

The economic conditions of these two countries are most influential on the Japanese stock market.

2. Japan’s Economic Growth (GDP)

If GDP grows well, companies can generate higher profits, positively affecting stock prices directly.

3. Monetary Policy

Loose monetary policy with low interest rates:

• Reduces operating costs for companies
• Increases profits
• Positively impacts stock prices

Monitor whether the policy will tighten or loosen.

4. Fiscal Policy

Increased government investment and lower taxes:

• Stimulate the economy
• Benefit entrepreneurs
• Positively influence the overall index

5. Changes in Industry Sectors

Economic structure, government policies, consumer behavior, and competition impact especially the technology industry, which has the highest proportion.

6. Company Earnings of the 225 Stocks

Revenue, profit figures, and forecasts from these companies directly affect stock prices.

7. Yen Exchange Rate

• Strong Yen → Japanese goods appear expensive → Lower sales → Reduced income → Falling stock prices
• Weak Yen → Japanese goods appear cheap → Higher sales → Increased income → Rising stock prices

8. Global Oil Prices

Japan relies heavily on oil imports; high oil prices lead to:

• Increased production costs
• Lower earnings
• Falling stock prices

3 Reasons to Invest in Nikkei 225

1. Own shares of major companies easily

If you believe Japan’s economy will grow well in the future but don’t want to manage a portfolio actively, investing in Nikkei 225 allows you to own a part of 225 top companies.

2. High liquidity

The index’s stock selection criteria focus on high liquidity, which results in:

• Lower transaction costs
• Narrow bid-ask spreads
• Less price impact
• Better investment efficiency (Especially when investing via funds)

3. Diversify across countries

You can:

• Move investments out of the Thai market
• Find alternatives when SET50 faces issues (such as political crises)
• Reduce risks from over-concentration in a single market

However, investing in Nikkei 225 also involves high risks due to:

• Significant price volatility
• The need for close market monitoring (for short-term trading)
• But this volatility also offers higher profit opportunities.

2 Ways to Invest in Japanese Stocks via Nikkei 225

Besides directly buying individual Japanese stocks, you can also invest through two types of financial products:

Method 1: Exchange Traded Fund (ETF)

Examples of products:

• KT-JPFUND-A by Krung Thai Asset Management
• TMPJE by TMBAM Eastspring

Advantages:

• Invest in multiple companies, building a diversified portfolio
• Lower risk than individual stocks
• Suitable for beginners

Risks:

• Issuer risk
• Liquidity risk
• Currency risk
• Fund management risk

Method 2: Contract for Difference (CFD)

A CFD is a financial instrument that allows you to:

• Profit from index price movements
• Not own the actual stocks, only hold a contract
• Use margin (only a portion of the total value) for trading

Example: With 1:100 leverage, you can:

• Deposit 100 baht as margin
• Control an index worth 10,000 baht

Advantages of CFDs:

• Use less capital
• Achieve higher returns
• Suitable for short-term trading

Risks of CFDs:

• Very high risk
• Small price fluctuations can wipe out the margin
• May be forcibly closed at a loss
• Different from ETFs, where you own actual shares

Choose reputable brokers regulated by trustworthy authorities, and be cautious of the risks associated with high leverage.