What is the 'Nikkei'?

The Nikkei is short for Japan's Nikkei 225 Stock Average, the leading and most-respected index of Japanese stocks. It is a price-weighted index composed of Japan's top 225 blue-chip companies traded on the Tokyo Stock Exchange. The Nikkei is equivalent to the Dow Jones Industrial Average Index in the United States.

BREAKING DOWN 'Nikkei'

Formerly called the Nikkei Dow Jones Stock Average (from 1975 to 1985), it is now named after the "Nihon Keizai Shimbun" or Japan Economic Newspaper, commonly known as Nikkei, which sponsors the calculation of the index. The index has been calculated since September 1950, retroactive to May 1949. Among the best-known companies included in the Nikkei index are Canon Incorporated, Sony Corporation and Toyota Motor Corporation. It is the oldest stock index in Asia.

The Nikkei was established as part of the rebuilding and industrialization of Japan in the aftermath of the Second World War. Constituent stocks are ranked by share price, rather than by market capitalization as is common in most indexes. Valuations are denominated in Japanese yen. The composition of the Nikkei is reviewed every September, and any needed changes take place in October.

Background to the Nikkei

The Tokyo Stock Exchange was established in 1878. In 1943, during the Second World War, the Japanese government combined the TSE with five others to form a single Japanese Stock Exchange. That exchange was closed down in August 1945 toward the end of the war. The Tokyo Stock Exchange re-opened on May 16, 1949, under the aegis of the new Securities Exchange Act.

Japan experienced a major asset bubble in the late 1980s when the government used fiscal and monetary stimuli to counteract a recession caused by the Japanese yen's 50% appreciation during the first part of the decade. According to TraderHQ, stock prices and land values tripled between 1985 and 1989; at the height of the bubble, the TSE accounted for 60% of global stock market capitalization.

The bubble burst in 1990, and the value of the Nikkei Index fell by one-third that year. According to Seeking Alpha, in October 2008, the Nikkei traded below 7,000; this was a decline of more than 80% from its December 1989 high. It subsequently rebounded between June 2012 and June 2015 with the help of economic stimulus from the Japanese government and the Bank of Japan, but the Index was still nearly 50% below the 1989 high.

Investing in the Nikkei Index

It is not possible to directly purchase an index, but there are several exchange traded funds (ETFs) whose components correlate to the Nikkei. ETFs that track the Nikkei and trade on the Tokyo Stock Exchange include Blackrock Japan's iShares Nikkei 225 and Nomura Asset Management's Nikkei 225 Exchange Traded Fund. The MAXIS Nikkei 225 Index ETF is a dollar-denominated fund that trades on the New York Stock Exchange.

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