J225 index forecast: Will it brave macroeconomic headwinds?
Hailed as the flagship index of the Tokyo Stock Market, the Japan 225 (J225) Index, popularly known as the Nikkei 225, is a price-weighted stock market index for the Japanese market.
The index measures the performance of 225 Japanese companies across a broad set of industries. The index remains indicative of the state of Japan’s economy.
With the emergence of the Covid-19 pandemic in March 2020, the Nikkei 225 dropped to a low of 16,552.83 on 19 March 2020. However, as a result of robust government support and gradual reopening of economies, the index bounced back and reached 26,000 points by November 2020, for the first time since 1991.
The Japanese stock markets have been on a steady decline since the start of 2022, with peaking inflation, tightening global monetary policies and European geopolitical tensions. At the time of writing (14 July), the J225 Index had last closed at 26,478.77 – a 9.63% fall from 29,301.79 on 4 January.
As the Japanese economy navigates in the post-pandemic world, what could be expected from the Nikkei 225 Index? In this Japan 225 forecast, we look at the recent performance, see how it compares with other Japanese indices and reveal analysts’ J225 predictions for the coming months.
Understanding the J225 Index
The history of the Japan 225 Index traces back to the post-war era. It was officially launched in 1950, but was calculated to 16 May 1949. It has been calculated daily by the Nihon Keizai Shimbun (The Nikkei) newspaper since its initiation.
The J225 was administered originally by the Tokyo Stock Exchange (TSE). It was taken over by the Nikkei newspaper in 1970.
The Nikkei 225 is a price-weighted equity index. Similar to the US Dow Jones Industrial Average (US30), the Nikkei 225 is calculated by dividing the aggregate par value of all constituents by a flexible divisor. By dividing the summation of adjusted prices by the divisor, the Nikkei 225 is adjusted for any non-market price changes such as stock splits, reverse splits and constituent changes.
This flexible divisor, often called the DOW adjustment, is included to maintain index continuity by eliminating the effect of external factors not directly related to the market movements, to arrive at an unbiased price-weighted index.
Constituents of J225
The J225 includes 225 selected stocks from the domestic stocks trading in the Prime Market of the Tokyo Stock Exchange. They are reviewed annually in October and are subject to changes based on the results. Stocks are selected and removed from the index based primarily on the liquidity and sector balance.
From the 36 recognised industrial classifications in the Japanese stock markets, Nikkei’s constituents came from six sector categories: technology, materials, consumer goods, capital goods, financials and transportation and utilities.
Technology holds the major weight comprising 48.43% of the index with 58 constituent stocks. This means the performance of Nikkei 225 is heavily reliant on tech companies, and therefore dependent on technological innovations.
Some of the top companies by weight in the Nikkei 225 at the time of writing on 14 July were consumer goods giant Fast Retailing (9983), semiconductor business Tokyo Electron (8035) and telecommunication services Softbank Group (9984).
TOPIX and Nikkei 225 movements
TOPIX is another market benchmark for the Japanese stock market. It’s calculated by the JPX Market Innovation & Research. TOPIX has an extensive collection of stocks listed in the Tokyo Stock Exchanges Prime Market.
Differentiating its calculation method from Nikkei 225, the TOPIX index follows a free-float adjusted market capitalisation method. The index’s performance is largely affected by large cap stocks such as Toyota (7203) and Sony Group (6758).
Like the Nikkei 225, TOPIX has been on a steady decline since the start of 2022. While it started the year at 2,030.22 on 4 January, it was down by 141.37 points or 6.96% at the time of writing on 14 July, last closing at 1,888.85.
With the Ukraine-Russia geopolitical tensions mounting and US Federal Reserve (Fed) hiking rates in March, the TOPIX index fell to its lowest level of the year at 1,758.89 on 9 March. On the same date, Nikkei 225 also marked its lowest level of 2022 at 24,717.53.
The assassination of Japan’s longest serving prime minister Shinzo Abe on 8 July saw both the Nikkei 225 and Topix lose most of their previous week’s gains. On 8 July, the Nikkei 225 Index closed up 0.1% at 26,517.19 after climbing 1.4% a day before. Similarly, the TOPIX index also cut back its gains and closed the week only 0.27% higher at 1,887.43.
Will Abenomics and easy monetary policy end in Japan?
Popularly known for his trademark Abenomics policies that advocated bold monetary easing and fiscal spending, Shinzo Abe’s contributions have been instrumental to the political and economic landscape of Japan.
Jun Morita, general manager of the research department at Chibagin Asset Management, commented on the former Japanese prime minister’s assassination and its effect on the stock markets and J225 forecasts:
Additionally, Morita felt that Abe’s assassination could affect the Bank of Japan’s (BoJ) ultra-loose monetary policy, which could adversely affect the stock markets.
While most central banks have hiked rates in the current high-inflationary environment, the BoJ has continued to maintain its ultra-easy monetary policy. Sayuri Shirai, a former member of the central bank’s policy board and Keio University professor, stated that the central bank doesn’t have much choice but to maintain the status quo at a time where markets are highly volatile.
On 16 June, the Fed hiked rates by 0.75 percentage point, its third rise of the year and largest since 1994. The next day, the Nikkei 225 fell by 1.77% and closed at 25,963, marking a weekly-fall of 1,024.44 points, or 3.8%.
Koya Miyamae, senior economist at SMBC Nikko Securities, believed that the central bank could consider some form of tweak to its monetary policy, given the problems such as the weak yen. In the short term, though, he thought there wouldn’t be a quick reversal of Abenomics or an exit from the BoJ’s ultra-loose stance on monetary policy.
The J225 Today
At the time of writing (14 July), the J225 Index last closed at 26,478.77 marking a 1.77% decline from 26,987.44 a month earlier. With the announcement of the latest US inflation data report on 13 July, investors are fearing yet another rate hike by the Fed to control inflation.
Another cause for the subdued Nikkei 225 may be rising coronavirus infections in Japan, with a weekly increase of 30,771 cases confirmed on 10 July. At the start of the week beginning 11 July, new daily cases surpassed the 50,000 mark for 3 days in a row.
Fearing an economic slowdown, technology stocks led a decline in the Nikkei 225, with SoftBank Group, Tokyo Electron and Keyence falling by 4.3%, 2.9% and 3%, respectively. Other index heavyweights such as Fast Retailing, Sony Group and Mitsubishi UFJ reported declines by 0.7%, 1.5% and 1.4%, respectively.
J225 forecast for 2022 and beyond
With the latest reports of disruption in natural gas supplies from Russia, it is expected that the Japanese government could be developing a framework for power usage. By setting consumption targets, businesses and households may be urged toward power conservation.
Japan heavily relies on imports for its energy resources and disturbances in this channel could adversely affect the broader markets and J225 forecast for 2022.
According to Trading Economics, as of 14 July, the J225 Index was expected to move down to trade at 25,623.56 points by the end of the third quarter of 2022. Looking forward, the forecasting service suggested the index could drop to 23,120.34 in 12 months.
As of 11 July 2022, The Economic Forecast Agency in its J225 forecast for 2022 predicted that the index could trade at 28,587 points by the end of August 2022 – the maximum value of the index was forecast at 29,551 and the minimum at 25,685 by December 2022.
Neither service provided J225 forecasts beyond 2024. This restricts the ability to provide J225 forecasts for 2025 and 2030.
J225 Index: Analyst Insights
On 25 May, 13 analysts in a Reuters poll predicted the Nikkei 225 to rise to 29,000 by the end of 2022. In this poll, the maximum J225 prediction of 31,000 was from Nomura and SMBC Nikko Securities.
Hiroshi Namioka, fund Manager and chief strategist at T&D Asset Management, expects the Nikkei to end the year at 28,800:
Dai-ichi Life Research institute predicted stock volatility to gradually decline over the next few months.
Senior economist Koichi Fujishiro commented that “economic reopening in Japan is coming later than the US and Europe, but because of that, we can expect an upside risk to Japanese stocks that gives them some attraction as an investment.”
Milan Vaishnav, CMT, MSTA, Founder and Technical Analyst at Chartwizard.ae, shares his opinion on the Japan 225 forecast:
Note that analysts’ forecasts can be wrong. Forecasts shouldn’t be used as a substitute for your own research. Always conduct your own due diligence before investing. And never invest or trade money you cannot afford to lose.
FAQs
Is the J225 a good investment?
The J225 is regarded as the barometer of the Japanese economy, therefore its performance is largely dependent on the macroeconomic environment it operates in.
Whether this makes the index a good investment for you or not will depend on your portfolio composition, investment goals and risk profile, among other factors. Different trading strategies will suit different investment goals with a short or long-term focus. You should do your own research. And never invest money you cannot afford to lose.
Will the J225 go up or down?
No one knows for sure. By the end of Q3 2022, Trading Economics predicted the J225 to trade at 25,623.56. However, forecasting and analysts’ predictions can go wrong. You must always conduct your own research before making any trading decision.
Should I invest in the J225?
The J225 Index includes Japan’s most prominent, blue-chip 225 stocks. However, since the start of the year, the index has been on a downtrend and lost 8.5% year-to-date due to macroeconomic headwinds. Whether you should invest in the J225 index depends on your personal investing goals and portfolio composition. Always do your own research. And never invest more money than you can afford to lose.
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