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Top 10 Stock Market Indexes in Japan

Japan is the world’s third-largest economy, only behind the United States and China. And it has numerous multinationals that make its stock market the second largest by market capitalization. For those interested in investing in Japan, we analyze its 10 most important stock market indexes.

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Introduction

The Japanese economy is the second largest in the world. In terms of Gross Domestic Product, only the United States and China are ahead. And this is in part because they both have a much larger population than Japan. Japan´s population is about 125 million people.

Despite its demographic stagnation since the early 1990s, as well as its projected population decline, Japan will remain an economic powerhouse well into the twenty-first century. While it is true that an aging population will not be a positive factor for economic growth, it does not mean that things will collapse either.

Japan has long been taking action to safeguard its future prosperity. Some of the measures taken include technological innovation, the expansion of its multinational companies abroad, reducing the need for domestic workers, as well as a very high level of savings, providing the country with huge amounts of accumulated wealth and capital.

The Japanese stock market is made up of many different exchanges. The most important one is the Tokyo Stock Exchange, located in the country’s capital. However, other stock exchanges, such as Osaka´s, are also very important.

The market capitalization of the entire Japanese stock market is the second largest in the world, second only to the United States. Japan is home to many leading multinationals in various economic sectors.

Some examples of Japan’s top corporations include Toyota, Sony, Mitsubishi, Sumitomo, and Honda.

Moreover, the macroeconomic situation indicates that Japan may finally be emerging from a long period of economic stagnation and credit deflation. If this proves correct, the Japanese stock market may be one of the most interesting in the coming years.

For those who want to invest in Japan without having to select individual stocks, in the following sections we will analyze the most important stock market indexes in the country. There are important differences between them. Hence, gaining a good understanding about these indices will allow you to select the one that best suits your preferences.

Japan’s Top 10 Stock Market Indexes

The indexes below are calculated by many different companies. There are millions of investors interested in allocating part of their capital to Japan, so there is a big incentive for companies to create and promote stock market indexes.

The important thing when it comes to using a stock market index is not necessarily who calculates it, although this is a fact that we will mention. What is most important is knowing how it is calculated. This includes things such as how many companies are included in an index, what criteria are used to select them, and how those companies are weighed. That information will allow you to identify the index that best suits your needs.

1) Nikkei 225

The Nikkei 225 is Japan’s main stock market index, although there are certain disadvantages when it comes to using it as a benchmark. The reason for its success is that it receives a lot of coverage from the financial media.

The Nikkei 225 index was introduced in 1950 by a media conglomerate called Nikkei. Nikkei is the company that publishes the newspaper of the same name in Japan. It is the daily financial newspaper with the largest circulation in the world.

The Nikkei group also owns the British company Financial Times, which once created the FTSE 100 index, the main benchmark for the UK stock market.

The Nikkei 225 is made up of 225 of the largest and most liquid companies on the Tokyo Stock Exchange. The members of the Nikkei 225 belong to different sectors of the economy. The list of stocks that make up the index is updated once a year.

This index reached its all-time level high on December 29th, 1989 at 38,957 points. Over the following years, it lost 82% of its value, reaching a low of 7,055 points in March 2009. It has been slowly recovering since.

A very curious feature of the Nikkei 225 is that, unlike most other stock indexes, it weights companies based on their price, instead of their market capitalization or market capitalization adjusted for free float. As a result, the size of a company has no impact whatsoever on how important the stock will be within the index.

This has important consequences, as the stock of a small company with a high nominal price will receive a higher weight within the index then the stock of a large company whose nominal price is lower.

For this reason, the Nikkei 225 is not really the best indicator to measure the performance of the Japanese stock market. While this may not be relevant for the financial press, it is something investors should consider, especially those who want to put their capital in Japan.

At the end of the day, we must remember that our capital would be allocated to individual companies by a criterion as irrelevant as the nominal stock price of each company.

For those interested in learning more about this index, they can visit the Nikkei website.

2) Nikkei 300

Nikkei publishes additional stock indexes for the Japanese stock market. One of them is the Nikkei 300, made up of 300 of the largest companies listed on the Tokyo Stock Exchange. Many of them are also part of the Nikkei 225.

The main difference though is that the Nikkei 300 weights its companies based on their market capitalization, that is, how big they are. This means that larger companies receive a higher weighting within the index.

The Nikkei 300 was introduced in 1993 with the goal of giving a more honest representation of how the value of the Japanese stock market performs. It is also a good index for those looking for a passive investment vehicle.

If you want to read more information about the Nikkei 300, you can visit its official website.

3) JPX Nikkei 400

The JPX Nikkei 400 is a stock market index calculated in partnership between Nikkei and the Tokyo Stock Exchange. It was introduced in 2013 with the aim of creating an index that was built with slightly different criteria than others.

Thus, the JPX Nikkei 400 is composed of 400 of the 1,000 largest and most liquid companies traded on the Tokyo Stock Exchange. These 400 companies are selected based on a few criteria, such as their market capitalization, their return on equity, as well as their accumulated operating profits.

Once 400 companies have been selected, they are weighted based on their market capitalization adjusted for free float. As a consequence of that, the largest corporations tend to dominate within the index.

It should be noted that the JPX Nikkei 400 is also updated annually. And that it is published in many different currencies.

You can find more details about it under this link.

4) TOPIX

The TOPIX (Tokyo Stock Price Index) is a stock market index calculated by the Tokyo Stock Exchange itself. It was introduced in 1969 and is very different from the other indexes we have analyzed so far.

Thus, the TOPIX is composed of all companies listed in the main category of the Tokyo Stock Exchange. These are the stocks with the largest market capitalization and best liquidity. However, many of them are still quite small.

The exact number of stocks within the TOPIX fluctuates over time, depending on how many companies go public or are delisted. But there are usually around 1,700 companies within it. Many more than in other indexes.

Within the TOPIX, companies are weighted based on their free float-adjusted market capitalization. Hence, while there are many stocks in the index, it is the larger ones that tend to dominate its performance.

You can find more information about the TOPIX on the Tokyo Stock Exchange website.

5) Tokyo Stock Exchange REIT Index

The Tokyo Stock Exchange also calculates the Tokyo Stock Exchange REIT index. It is composed of all real estate companies listed on the Tokyo Stock Exchange that are incorporated in the form of REITs.

REIT is the acronym for Real Estate Investment Trust. REITs are corporations whose business is about investing in long-term real estate assets. This means they buy, operate and rent out real estate with the goal to generate recurring income. REITs can focus on housing, office space, hotels or even data centers.

For this reason, this index is very interesting for those who want to invest their money in the Japanese real estate sector, which was the target of much speculation during the Japanese real estate bubble of the 1980s.

Within the Tokyo Stock Exchange REIT index, REITs are weighted based on their market capitalization adjusted for free float.

If you want to learn more about this index, you can visit the Tokyo Stock Exchange website.

6) MSCI Japan

The US company MSCI calculates a couple of stock market indexes for Japan. The main one of them is the MSCI Japan. This index is composed of all Japanese companies that are part of the global stock market index of developed nations MSCI World.

The exact number of stocks within the index fluctuates depending on how many companies meet the criteria to be included in the index. However, we usually find more than 200 companies within the MSCI Japan. This makes it a very diversified index.

Within the MSCI Japan, companies are weighted based on their free float-adjusted market capitalization. It is important to note that Japan is the country with the second largest allocation within the MSCI World stock index, behind the United States and ahead of the United Kingdom.

If we were to look at the MSCI ACWI index, which combines both developed and emerging countries, Japan would still be in second place. However, the third place would be for China, whose stock market is slightly larger than the United Kingdom´s.

If you want to find more details about the MSCI Japan, you can visit the MSCI website.

7) MSCI Japan IMI

The MSCI Japan IMI is the other Japanese stock index calculated by MSCI. And it has a very similar logic to the previous one.

Thus, the MSCI Japan IMI is a stock market index composed of all Japanese companies that are part of the global index for developed countries MSCI World IMI. The main difference between the indexes we have analyzed before and the IMI indexes is that IMI indexes require a smaller market capitalization in order to include a company.

For this reason, IMI indexes have many more constituents. Within the MSCI Japan IMI, there are more than 1,000 companies. So it can be a good option if we want to be more exposed to Japanese stocks with small capitalizations.

It is important to mention that the MSCI Japan IMI also weights its companies based on their market capitalization adjusted for free float. As a result, the same companies dominate both MSCI indexes. And the correlation between the two indexes is very high.

Here is the link to the official website of MSCI, so you can find more information.

8) FTSE Japan

FTSE Russell, a subsidiary of the London Stock Exchange that publishes market indexes, also calculates stock indexes for Japan. The main one being the FTSE Japan.

The FTSE Japan index is made up of all Japanese stocks that are part of the global FTSE All World Index. In this sense, its methodology is very similar to that of the MSCI Japan, with which it has a very high correlation.

The exact number of companies in the index fluctuates over time, but is usually around 200. And they are also weighted according to their market capitalization adjusted for free float.

The FTSE Japan is one of the most common alternatives for those looking for a passive investment vehicle, such as an ETF, with which to invest in Japan.

More details about this index can be found on the FTSE Russell website.

9) FTSE EPRA Nareit Japan REITs Green Focus Select

FTSE Russell also calculates an index for the Japanese real estate sector. The FTSE EPRA Nareit Japan REITs Green Focus Select, an index with a very long name, can be a good alternative to the Tokyo Stock Exchange REIT Index, analyzed above.

This index is composed of Japanese real estate investment trusts. An important thing to bear in mind is that the methodology of the index uses environmental criteria to assess which companies are to be included in the index.

These criteria are about making buildings more sustainable, reducing their energy consumption or producing energy by installing solar panels. In any case, the correlation between both real estate indexes analyzed in this article is pretty high.

If you want to read more details about this index, you can use this link to the FTSE Russell website.

10) S&P Japan 500

Finally, the American company S&P Dow Jones, published of famous indexes such as the S&P 500 and the Dow Jones Industrial Average, also calculates a very useful stock market index for Japan.

The S&P Japan 500 is the Japanese equivalent of the US S&P 500. Therefore, the S&P Japan 500 is composed of the 500 largest companies listed on the Japanese stock exchange. The list of companies is updated on a regular basis.

Interestingly, S&P Dow Jones also publishes the S&P China 500 index.

Within the S&P Japan 500, stocks are weighted based on their free-float-adjusted market capitalization. As a result, it is highly correlated with many of the indexes analyzed before.

The S&P Japan 500 is another good alternative for those looking for an ETF with which to invest in Japan. You will find more details about it on the S&P Dow Jones website.

Conclusion

The Japanese stock market is very large, rich and varied. As a consequence of that, there are numerous stock market indexes for Japan. In this article we have focused only on the most important ones.

In any case, the indices we have analyzed should be enough for most investors who want to allocate a portion of their capital to the Japanese stock market. Hence, there is no need to look for additional indices.

A decision that investors have to make is whether they want to hedge the currency risk. Currency risk is the potential risk coming from losses due to the devaluation of a foreign currency. If we invest in stocks denominated in Japanese yen, a devaluation of the yen against our domestic currency is likely to be negative for our portfolio performance.

Most international investors do not hedge their currency risk when investing abroad. Since these hedges tend to come at a cost.

However, due to how these FX financial derivatives work, hedging the currency risk can be interesting when our domestic currency has much higher rates than the foreign currency.

The interest rate hikes that have taken place in 2022 and 2023 in the United States, the euro zone, the United Kingdom, Mexico and many other jurisdictions mean that hedging the risk of the Japanese yen is very attractive. In fact, we can generate an additional 3-4% return by simply hedging that risk.

The only significant negative aspect of doing it is that if the Japanese yen strengthened against our domestic currency, we would not benefit from such a move. However, we would still generate the additional return that came with the currency hedge.

If you want to explore the idea of hedging the currency risk in greater detail, I suggest you take a look at this post where I made an in-depth analysis of the topic:
Currency Risk – Everything You Need to Know

When looking for an ETF that hedges currency risk, simply pay attention to those funds whose name includes the word “hedged” and the currency into which they hedge the foreign currency exposure.

Finally, I also encourage you to subscribe to my newsletter in order to be on top of what is going on in the financial markets:
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