The Nikkei 225 is the leading indicator of the performance of the Tokyo Stock Exchange. It is made up of 225 domestic stocks chosen from the most liquid shares in the exchange’s first section where the blue chip companies are listed.
It is a price-weighted index so stocks with a higher price will have a higher weighting and therefore more influence over the index’s performance. As of November 2017 the market capitalisation of the index was ¥400 trillion.
The index is compiled by Nikkei, publishers of Japan’s leading financial newspaper, and is calculated every five seconds during regulated trading hours.
The make-up of the index is reviewed by Nikkei every October to ensure that it is representative. Stocks with high market liquidity may replace those with low liquidity. The balance of the sectors is also considered.
Changes to the index can take place at other times due to events such as company mergers or bankruptcies.
In the October 2017 review there were two changes to the Nikkei 225 index. Recruit Holdings and Japan Post Holdings replaced Hokuetsu Kishu Paper and Meidensha.
In August 2017 Toshiba was relegated to the second section of the stock exchange and so replaced in the Nikkei 225 by Seiko Epson.
The index’s divisor (part of the way it is calculated) will change when new stocks are included to keep the index consistent.
The highest current weighting in the Nikkei 225 of 6.79% belongs to Fast Retailing, the group that owns Uniqlo. The top five by weighting is:
- Fast Retailing
- Softbank Group
- Tokyo Electron
The Nikkei 225 has six categories consolidated from the 36 Nikkei industrial classifications. In order of size they are:
- Consumer goods
- Capital goods/others
- Transportation and utilities
Highs and lows
The index was launched on 7 September 1950 with its value calculated back to 16 May 1949. Its highest closing value was 38,915.87 on 29 December 1989 at the height of the Japanese asset price bubble. Its lowest value was 7054.98 on 10 March 2009.
In October 2017 the index set a record of closing higher for 16 consecutive days. It also reached a 21-year high of 21,805.17 on 24 October.
This was due to investor expectations that Prime Minister Shinzo Abe's ruling coalition would win Japan’s lower house election.
However this record high was still a long way off from its 1980’s peak.
The Nikkei’s largest fall in value took place on 20 October 1987 (Black Monday) when it lost nearly 15% in a single day. Another large fall of nearly 11% occurred on 15 March 2011 following the Fukushima nuclear disaster.
The index’s highest daily rise of over 14% was on 14 October 2008 as global markets bounced back following efforts to shore up ailing banks.
The Tokyo Stock Exchange’s origins go back to 1878, making it the second oldest in Asia. It opened under its current name in 1949. By market capitalisation it is currently the fourth largest stock exchange in the world.
The index of leading shares was originally administered by the Tokyo Stock Exchange but was taken on by Nikkei in July 1970.
Nikkei was licensed to use the Dow name between May 1985 and May 1995 and so the index has also been known as the the Nikkei Dow-Jones Stock Price Average and the TSE Dow.
The current way of changing the constituents of the index was introduced in April 2000.
As the leading Japanese index the Nikkei 225 is used as an underlying reference for options and futures, funds, exchange traded funds and structured products. It can also be traded as a contract for difference.
The volatility index for the Nikkei 225, which shows the rate at which prices in the index have been increasing and decreasing, is currently around 17.
One of its most volatile days was 24 June 2016, the day after the UK’s Brexit vote, when the Nikkei 225 fell by nearly 8% and the volatility index hit 40.71.