Nikkei: How It Works and Special Considerations

Key takeaways

• The Nikkei (Nikkei 225) is Japan’s leading stock index, made up of 225 blue‑chip companies listed on the Tokyo Stock Exchange (TSE).
• It is a price‑weighted index, so companies with higher share prices have greater influence.
• The index is calculated in Japanese yen and updated frequently while the TSE is open.
• TOPIX is an alternative Japanese index that is capitalization‑weighted and covers all TSE listings.

What is the Nikkei?

The Nikkei 225, commonly called the Nikkei, is a price‑weighted stock index that tracks 225 of Japan’s largest and most liquid companies traded on the Tokyo Stock Exchange. It was created in the post‑World War II era and has long been the most widely recognized benchmark for Japanese equities.

Typical constituents include Sony, Canon, Toyota, Nissan, and Honda.

How the index is calculated

• Price‑weighted: each company’s weight in the index is based on its share price rather than market capitalization. Higher‑priced shares exert more influence on index moves.
• Currency: values are denominated in Japanese yen.
• Frequency: the index is updated continuously (every few seconds) while the TSE is open.
• Review cycle: the Nikkei’s composition is reviewed annually in September with changes implemented in October.

Historical context and the Tokyo Stock Exchange

The Tokyo Stock Exchange, founded in the late 19th century, evolved into Japan’s primary equities market. Japan experienced a major asset bubble in the late 1980s—driven by monetary and fiscal stimulus—that pushed stock and land prices to historic highs. The bubble burst around 1990, and the Nikkei fell dramatically from its peak. The index later rebounded in the 2010s following renewed economic stimulus, but long‑term levels remain below the 1989 highs.

TOPIX vs. Nikkei

• Nikkei (price‑weighted, 225 selected stocks): More influenced by high‑priced shares, often skewed toward sectors with higher share prices (e.g., certain technology names).
• TOPIX (capitalization‑weighted, all TSE first‑section stocks): Weights stocks by total market value, so large‑market‑cap sectors (e.g., financials) exert greater influence.

Investors use both indices for different perspectives: Nikkei reflects price movements of chosen blue‑chips, while TOPIX gives a market‑cap view of the broader TSE.

Investing and special considerations

• You cannot buy an index directly, but you can gain exposure through mutual funds, exchange‑traded funds (ETFs), and derivatives that track the Nikkei.
• Examples of ETFs tracking the Nikkei include iShares Nikkei 225 and Nomura’s Nikkei 225 ETF (listed in Japan), and MAXIS Nikkei 225 Index ETF, which is dollar‑denominated and has traded on U.S. exchanges.
• Be mindful that price‑weighting can produce different performance characteristics versus cap‑weighted indexes; sector and single‑stock price moves can disproportionately affect the Nikkei.
• Consider currency exposure, trading hours differences, and tax/timing implications when investing in Japan‑focused products.

Conclusion

The Nikkei 225 is a historic, price‑weighted benchmark representing 225 prominent Japanese companies. Its calculation method and composition make its behavior distinct from capitalization‑weighted indices like TOPIX. Investors seeking Japanese equity exposure should understand these structural differences and use appropriate ETFs or other instruments to implement their views.