he Nikkei 225 is a stock market index for the Tokyo Stock Exchange (TSE). It is calculated daily by the Nihon Keizai Shimbun (Nikkei) newspaper. The Nikkei was first calculated in 1950 and is the most widely quoted average of Japanese stocks.
It is similar to the US’ Dow Jones Index in that it is a price-weighted index so companies with higher share prices receive a larger weighting when determining the value of the index. It was in fact called the Nikkei Dow Jones Stock Average from 1975 to 1985.
The Nikkei measures the performance of 225 large, publicly-owned companies in Japan from a wide array of industry sectors. It therefore maps the performance of the Japanese economy and is an indicator of investor sentiment towards Japanese equities.
Companies of the Nikkei 225 Stock Market Index
Below is a list of the fifteen largest companies in terms of share price on the Nikkei*.
|Fast Retailing||Nitto Denko||Tokyo Electron|
|FANUC||Toyota Motor||Daikin Industries|
|Central Japan Railway||Secom||Kyocera|
|East Japan Railway||Shin-Etsu Chemical||Nippon Telegraph & Telephone|
*As of 30th September 2013
Fast Retailing is the largest company on the Nikkei. Its share price is over double that of FANUC, priced at 36,850 Yen as of the 30thSeptember 2013. Fast Retailing is a retail holding company that owns the Uniqlo clothing brand among several other well known Japanese brands. It has a weight of over 9% of the Nikkei.
The Nikkei is heavily influenced by technology companies. Pharmaceuticals, electric machinery and communications fall under the technology sector. It is therefore important to understand the performance of these sectors of the economy when trading the Nikkei.
Admission to the Nikkei
The components of the Nikkei are reviewed on an annual basis every autumn. If a change is decided by the selection committee it takes place at the start of October. However, at any stage, we can see a change if a company is delisted from the Tokyo Stock Exchange (TSE). This is known as an Extraordinary Replacement and is usually the result of a bankruptcy or merger.
October 2013 will see the first changes to the Nikkei in two years. Nitto Denko and Tokyu Fudosan Holdings will replace Tokyu Land Corporation and Mitsubishi Paper Mills respectively. This is because Tokyu Land Corporation will be delisted from the TSE and will form a new holding company. Mitsubishi Paper Mills is being removed due to a decline in liquidity.
The goal of the Nikkei is to portray an accurate representation of the Japanese economy and their equities market. A constituent must be a domestic company listed on the Tokyo stock exchange and issue ordinary shares for it to be listed on the Nikkei. Industry sector balance (from the six above in our pie chart) and trading volume/liquidity are two criteria which are assessed when selecting constituents.
Calculation of the Nikkei
Just like the Dow Jones 30 the Nikkei is calculated using the price of each share rather than the overall market capitalization of the company. However, the share prices are all adjusted by a ‘presumed par value’ so stocks traded by a lot size of 1 have a different price level than shares traded by a lot size of 100 or 1000 shares.
The divisor is amended based on corporate actions such as stock splits and mergers, as well as for the introduction of new constituents. As of the 1st October 2013 the divisor is set at 25.414. This was increased from 24.975 because of the two additions we mentioned above as well as a 1.1 – 1 stock split of Nisshin Seifun Group.
The Value of the Nikkei
Historically the Nikkei has bucked the trend of other national stock indices. The textbook model of stock averages is that they have grown steadily over the years with a sharp decline during periods of recession and political instability.
Recent Historical Performance of the Nikkei
On March 15, 2011, we saw the Nikkei plunge over 10% in one day to 9605.15. This was shortly after the devastating earthquake hit the northeast part of Japan. The index continued to drop throughout 2011, eventually bottoming out at 8160.01 on November 25, putting it at its lowest close since March 10, 2009. The Nikkei fell over 17% in 2011, finishing the year at 8455.35, its lowest year-end closing value in nearly thirty years when the index finished at 8016.70 in 1982.
2013 has been an exceptional year in terms of gains for the Nikkei. This has been mainly because of Japan’s recent vigorous changes towards monetary and fiscal policy. Their new Prime Minister Shinzo Abe has ramped up government spending and the Central Bank of Japan has been injecting money into the economy at a massive scale. Abe is looking to make Japan’s labor market more flexible and encourage women to enter the workforce.
Things to Remember When Trading the Nikkei
- The Nikkei futures contract is tradable from 23:46 – 06:24 & 07:31 – 17:54 (GMT), Monday to Friday.
- The Nikkei moves in increments of 5.00.
- The margin requirement for trading the Nikkei is usually about 2% (i.e. 50 to 1 leverage) with most brokers.
- The minimum trade size is 100 indexes.
- The currency of the Nikkei is the Japanese Yen.
So let’s say we want to BUY 100 indexes of the Nikkei and it is currently priced at 14,100 and we have a US dollar-denominated trading account:
The margin (or funds) we would need to put up to open this position would be 282 Yen.
(14,100 ¥ (price of Nikkei) X 2% (margin requirement) = 282¥)
As we have a US Dollar account this will be automatically converted for us at the current USD/JPY exchange rate. So let’s say the current rate is 99.00.
We will then see $2.85 under the ‘used margin’ box in our platform.
If we have an account in a different base currency such as Euro, our margin remains 2% but our trading platform will automatically convert the ¥ 282 /$2.85 to Euro.
Every move in the DJ30 is ¥5.00, which is about 5c (US) so in our example, if we bought 100 indexes and the Nikkei rises from 14,100 to 14,400 we make a profit of $15.