What is Nikkei 225? History, Price & Reasons to Trade
The Nikkei 225 is the Japanese stock market index that features the most prominent businesses in the Japanese economy. In this piece, we explore what the Nikkei 225 represents, its history, the companies that constitute the index, and how to approach trading it.
What is the Nikkei 225 Index?
The Nikkei 225 is a major stock market index that lists the 225 largest companies by price weighting on the Tokyo Stock Exchange. The sheer size of the Japanese economy makes the Nikkei 225 a key measure of stock market activity in Asia, so it is important for traders to follow the Nikkei 225 to ascertain where the Japanese stocks are heading and also get an idea of sentiment and price action across the whole of East Asia.
The Japan 225 index is reviewed once a year at the beginning of October, and is calculated in real-time with updates every 15 seconds.
What are the Nikkei companies?
The Nikkei 225 companies include the likes of world-renowned car giants such as Toyota and Honda, in addition to electronics corporations such as Sony and Panasonic. However, there is a wide range of industries covered, from consumer goods to utilities and transportation concerns. As of February 2020, the largest 20 Nikkei companies by market cap are as follows:
Nippon Tel Corp
Shin-Etsu Chemical Co
Sumitomo Financial Group
History of the Nikkei 225
The history of the Nikkei 225 begins in 1950, but it was retroactively calculated to May the previous year. Originally, the index was administered by the Tokyo Stock Exchange but was taken on by the Nikkei financial newspaper in 1970.
The index hit an all-time high in December 1989 at the height of the Japanese asset price bubble, reaching a value of almost 39,000, but as of February 2020 has never regained those heights. Indeed, since 2000 the index has experienced double digit year-on-year losses seven times, compared to just two times for the Dow Jones. The underlines not only the difference in long-term performance of the Nikkei 225 and other global indices but also the level of stock volatility that the Japanese index can exhibit.
The following chart shows the history of the Nikkei 225 in the 21st century, highlighting the major fundamental events that shaped its price.
What Affects the Price of the Nikkei 225?
The Nikkei 225 price is moved by the share price of its constituent companies. Some of the most influential drivers of the index are:
- Currency Prices: Due to the nature of Japan’s export-led economy, the strength of its domestic currency is a leading determinant of the prices of stocks. A strong Yen means Japanese products may be less competitive internationally, which can sink stock prices. Conversely, a weaker Yen encourages demand abroad and can boost revenues, buoying the Nikkei 225. It stands to reason then that the Yen and the Nikkei tend to have an inversely-correlated relationship.
- Economic Data: As with other indices, any event that affects the political/economic backdrop can hit the index. One such measure is US non-farm payroll data, which demonstrates the interrelation between the Nikkei 225 and the Dow Jones. Also, in times of growth and high employment, consumer spending may rise, buoying certain stocks.
- Natural Disasters: Japan’s propensity to natural disasters can have a considerable effect on the Nikkei 225. For example, the 2011 Tōhoku earthquake and tsunami prompted huge selloffs, leading the index to drop more than 7% in the days following.
- Central Bank Policies: Bank of Japan policies can affect borrowing costs and spending patterns by businesses and consumers in Japan, affecting company revenues and in turn stock prices.
Why trade Nikkei 225?
- Liquidity: Nikkei 225 is a liquid market with high trading volume, meaning traders should mostly be able to enter and exit trades with a minimum of slippage and benefit from tight spreads. Read more on the benefits of stock market liquidity.
- Volatility: The Nikkei 225 is known as one of the most volatile stock indices. Macroeconomic releases and drivers such as JPY prices can move the Nikkei 225 price quickly, meaning significant opportunities – but also risks – for those in the know. Read more about the nature of stock market volatility.
- Correlation between assets: The Nikkei 225 has been said to mirror the behavior of other markets such as the Dow Jones, but also shows a negative correlation with the Japanese Yen, allowing for some portfolio diversification.
Further reading on Nikkei 225
Make sure you follow the live Nikkei 225 price with our interactive price chart, and keep up to date with the latest Nikkei 225 news and analysis. Our analyst articles offer in-depth insights on the Nikkei 225 and its constituent stocks to inform your trading. Read more on the major stock indices and how to trade them.
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