The Nikkei 225 is a stock market index of the Tokyo Stock Exchange (TSE). It is calculated daily by the newspaper Nihon Keizai Shimbun (Nikkei). It was first calculated in 1950 and is the most common to talk about Japanese titles.

It is similar to the Dow Jones in that it is a price-weighted index, so companies whose titles are more expensive have a greater weight when determining the value of the index. In fact, it was named Nikkei Dow Jones Stock Average from 1975 to 1985.

This index measures the results of 225 large publicly traded companies in Japan belonging to a wide range of industrial sectors. Therefore, it is an indicator of the strength of the Japanese economy and the confidence of investors in the equity of that country.

Companies of the Nikkei 225

It follows a list of the fifteen main companies listed on the Nikkei according to the price of their shares *.

Fast retailingNitto DenkoTokyo Electron
FANUCToyota MotorDaikin Industries
Central Japan RailwaySecomKyocera
East Japan RailwayShin-Etsu ChemicalNippon Telegraph & Telephone
SoftbankMEIJI HoldingsKDDI

* As of September 30, 2013

Fast Retailing is the largest Nikkei index company. Its shares cost more than double that of FANUC, listed at 36 850 yen as of September 30, 2013. Fast Retailing is a retail holding company that owns the Uniqlo fashion firm, among many other famous Japanese brands. It has a weight of more than 9% within the Nikkei index.

The Nikkei is greatly influenced by technology companies. Pharmaceutical, electrical machinery and communications companies fall within the technology sector. Therefore, it is important to know the evolution of these sectors of the economy if it is going to operate in the Nikkei.

Nikkei sector weighting

Admission in the Nikkei

Nikkei components are checked every year, during the fall. If the selection committee decides to make a change, this occurs at the beginning of October. However, modifications may occur at any time if a company ceases to be listed on the Tokyo Stock Exchange (TSE). It is what is known as extraordinary substitution and is usually the result of a merger or bankruptcy.

The first changes in the index in two years will take place in October 2013. Nitto Denko and Tokyu Fudosan Holdings will replace Tokyu Land Corporation and Mitsubishi Paper Mills, respectively. This is because Tokyu Land Corporation stops trading on the TSE to form a new holding. Mitsubishi Paper Mills comes out due to the reduction of its liquidity.

The goal of the Nikkei is to show an accurate representation of the Japanese economy and its equity market. Its members must be national companies listed on the Tokyo Stock Exchange and issue common shares. The balance of the industrial sector (of the previous six in our pie chart) and the volume of operations / liquidity are two criteria that are evaluated when selecting companies.

Nikkei calculation

Like the Dow Jones 30, the Nikkei is calculated using the price of each share instead of the total market capitalization of the companies. However, the price of the shares is adjusted to a “presumed nominal value” so that the securities traded in lots of 1 unit have a different price level than the shares traded in lots of 100 or 1000 titles.

The formula for calculating the Nikkei is as follows:

The divisor is modified based on corporate actions such as the division of securities and mergers, as well as the introduction of new members. As of October 1, 2013, the divisor is set at 25,414. It increased from 24,975 due to the two aforementioned incorporations as well as a fragmentation of 1.1-1 titles carried out by Nisshin Seifun Group.

Nikkei Value

Traditionally, the Nikkei has followed in the wake of other national stock indexes. The pattern of all indices shows a constant growth over the years with a marked decline during periods of recession and political instability.

The European and US indexes have reached (or almost) their historical highs during 2013. The Nikkei has deviated from this trend. The Japanese index reached its all-time record on December 29, 1989, during the highest moment of the Japanese asset price bubble. The Nikkei closed at 38 915.87 that day, having multiplied its value by six in the 80s of last century. From that date, a process of decline began in which all accumulated earnings were left. On March 10, 2009, the Nikkei closed 82% below that record level of 7054.98.

Nikkei historical evolution

Follow a day chart of Nikkei’s behavior from the beginning of 2009 to September 2013.

On March 15, 2011, Nikkei shot up and gained more than 10% in a single day, reaching 9605.15 points. This was followed shortly after by the devastating earthquake in the north of the country. The index continued to fall during 2011 and reached its lowest level of 8160.01 on November 25, closing at its lowest point since March 10, 2009. It lost 17% in 2011 and closed the year at 8455.35, its lowest annual closing value in history in almost three decades, after finishing 1982 in 8016.70.

2013 has been an exceptional year in terms of earnings for the Nikkei. This has been due, above all, to the recent changes implemented by the country in fiscal and monetary policy. Its new prime minister, Shizo Abe, has boosted public spending and the Central Bank of Japan has injected money into the large-scale economy. Abe intends to make the Japanese labor market more flexible and promote the incorporation of women into it.

Items to remember when operating on the Nikkei

  • Nikkei futures contracts can be traded from 23:46 to 06:24 and from 07:31 to 17:54 (GMT), Monday through Friday.
  • The Nikkei moves in sections of 5.00.
  • The margin required to operate in the Nikkei is usually around 2% (that is, a 50: 1 leverage) with most brokers.
  • The minimum size of the operation is 100 indices.
  • The currency of the Nikkei is the Japanese yen.

Operational Example

Imagine that we want to BUY 100 Nikkei indices, that their value is currently at 14 100 and that our trading account is denominated in US dollars:

The margin (or funds) that we would have to contribute to open that position would be 282 yen.

(¥ 14 100 (Nikkei price) x 2% (required margin) = ¥ 282). Since we have an account in US dollars, this amount will be automatically converted to the applicable USD / JPY exchange rate. Let’s think that guy is currently 99.00. The amount $ 2.85 will appear in the “margin used” box of our platform.

If we have an account denominated in another currency, such as the euro, our margin will still be 2%, but the platform would automatically convert the ¥ 282 / $ 2.85 to euros.

The Nikkei fluctuates in movements of ¥ 5.00, which is equivalent to about 5 cents (dollar) so, in our example, if we buy 100 indexes and the index goes up from 14 100 to 14 400, we would get a profit of $ 15.