Nikkei Index Essay

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The Nikkei Index  reflects a number  that  expresses the market-value-weighted average of a group of stocks. There are five Nikkei indices: the Nikkei 225, Nikkei 500, Nikkei 300, Nikkei JASDAQ, and Nikkei All Stock Index. The Nikkei 225 is the most widely tracked Japanese stock market index in world. Other popular Japanese stock market indices are the Tokyo Stock Price Index (TOPIX) and Nomura  400. Similar to broad-based stock market indices in other countries,  the  Nikkei 225 is an  indicator  of future economic  performance  of the overall economy. It is composed of the most liquid 225 stocks on the Tokyo Stock Exchange (TSE) First Section. These 225 companies represent about 69 percent of the total current profits and 68 percent  of total assets of all TSE First Section companies.  At the  end of 2007, there  were 2,976 publicly traded companies in Japan. The number of public companies  listed are TSE (2,389), TSE First Section (1,727), TSE Second Section (467), and TSE Mothers (195).

Nikkei 225 is calculated and published by the privately held Nikkei Inc. (Nikkei). Nikkei was established in 1876 and is the parent  company of Japan’s largest daily business newspaper, Nihon Keizai Shimbun. Occasionally, Nikkei removes  stock issues from  the index and replaces them with other issues because of bankruptcies,  mergers, and annual reviews in consideration of changes in each stock’s liquidity and Japan’s industrial  structure.   Nikkei  uses  industry  sector  rebalancing rules to assure that the index reflects possible changes in Japan’s industrial  structure.  The 225 stocks that compose the index are grouped into six sectors: Technology, Financial, Consumer  Goods, Materials, Capital Goods/Others, and Transportation/Utilities. The six sectors are composed  of 36 industries: (1) Technology: pharmaceuticals,  electrical  machinery, automobiles,  precision  machinery,  telecommunications; (2) Financial: banks, securities, insurance, miscellaneous finance; (3) Consumer  Goods: marine products,  food, retail, services; (4) Materials: mining, textiles, paper and pulp, chemicals, oil, rubber, ceramics, steel, nonferrous  metals, trading  companies; (5) Capital Goods/Others: construction, machinery, shipbuilding, transportation equipment,  miscellaneous manufacturing,  real  estate; and  (6) Transportation/ Utilities: railroads and buses, trucking, shipping, airlines, warehousing, electric power, gas.

The Nikkei 225 is modeled  after  the  Dow Jones Industrial  Average (DJIA). As with the DJIA, it is a price-weighted  average of stocks  in the  index. The DJIA consists of just 30 stocks and is much older. DJIA was first published in May 1896 by Charles Dow, former editor of the Wall Street Journal. The Nikkei 225 was created  in 1950. Since its beginning, the Nikkei 225 has been calculated using the Dow Jones method. Ex-rights-adjusted  prices of 225 stocks are summed and divided by a “divisor,” which on July 28, 2008, was 24.424. The divisor is occasionally adjusted to maintain consistency as firms enter and exit the index.

The Bubble  Economy

Nikkei 225 peaked at 38,916 Japanese yen on December 29, 1989, its highest level ever. At the peak, market capitalization  of TSE-listed shares accounted  for 97 percent of the market capitalization of all Japanese equity markets  combined  and  was roughly  equivalent  to  the  collective market  capitalizations  of the New York Stock Exchange, London Stock Exchange, Deutsche Borse, Swiss Exchange, Borsa Italiana, and BME Spanish Exchanges. From 9,703 yen in 1984, the index soared 300 percent over five years, creating one of two colossal “asset price bubbles” experienced  by Japan during  the  latter  half of the  1980s—reminiscent  of the  manias  recounted  in Charles  Mackay’s Extraordinary Popular Delusions and the Madness of Crowds: Tulipomania, the South Sea Bubble, and the Mississippi Scheme of the 17th and 18th centuries. In addition to the stock market bubble, another  bubble appeared  in Japan’s real estate  market.  The market value of one square meter  of land in Tokyo’s Ginza district  rose to US$1.5 million. According  to some estimates,  the  market  value of the  Imperial  Palace grounds  in central  Tokyo was higher than  all of the land in California.

The Nikkei 225 descent from the peak was nearly as steep  as the  climb had been. Between 1990 and 1991, the index descended  rapidly, falling to as low as 14,309 yen—a loss of 63 percent  of market  value in just over two years. By 2003 it sank further  to as low as 7,608 yen, equal to only 20 percent  of value at the December 1989 peak. On October 20, 1987, as the bubble was forming, the Nikkei 225 experienced the  largest percentage  decline  in its history,  falling 14.9 percent in a single day—so-called Black Tuesday, coming on the heels of Wall Street’s Black Monday, when on October 19, 1987, the DJIA fell 22.6 percent, its largest, single-day decline in history. On October 2, 1990, during  one of the  worst  long-term  market declines in Japanese stock market  history, the index experienced its largest percentage gain in a single day of 13.2 percent.

Other Nikkei Indices

The Nikkei 500 was created in January 1972 and comprises 500 First Section–listed  companies.  In other important respects, it is similar to the Nikkei 225. The index is reconstituted each year according to changes in trading volume, trading value, and market capitalization. The last reconstitution took place on July 22, 2008. Nikkei introduced the Nikkei 300 in October 1982. The base year of the Nikkei 300 is 1982, with October  1, 1982, equal to 100. As with most  other Nikkei indices, component stocks are selected from the TSE First Section. The index is periodically rebalanced in consideration of liquidity, stability, and sector coverage. The Nikkei JASDAQ Average contains all stocks listed on the JASDAQ Securities Exchange.

There   are   six  securities   exchange   markets   in Japan: the Tokyo Stock Exchange (TSE), Osaka Stock Exchange (OSE), Nagoya Stock Exchange (NSE), Sapporo Stock Exchange (SSE), Fukuoka Stock Exchange (FSE), and JASDAQ. JASDAQ is the only one specialized solely in venture  firms and small capitalization stocks. Other  Japanese exchanges created  “sections” that specialize in “small cap” stocks—TSE’s Mothers exchange,  OSE’s Hercules  exchange,  NSE’s Centrex exchange,  SSE’s  Ambitious  exchange,  and  FSE’s QBoard exchange.  In terms  of market  capitalization, the  top  four JASDAQ-listed firms are Yahoo Japan Corporation,  Rakuten, Jupiter Telecommunications, and McDonald’s Holdings Japan.

Of the 700 IPOs in Japan between 1998 and 2007, 48 percent  were  listed  on  JASDAQ. The other  52 percent  were listed on Mothers,  Hercules, TSE, and other  markets.  At the  end  of 2007, the  number  of listed companies  on  the  following Japanese securities exchanges were: TSE1 (1,727), TSE2 (467), OSE1 (641), OSE2 (249), Hercules (172), Mothers (195), and JASDAQ (976). Note that some companies are listed on more than one exchange. At the end of 2007, the total market capitalization, in trillions of Japanese yen, for each, was: TSE1 (475.6), TSE2 (5.4), OSE1 (322.1), OSE2 (2.1), Hercules  (1.7), Mothers  (2.8), and JASDAQ (13.4). Total trading value for each, in trillions of Japanese yen was: TSE1 (688.5), TSE2 (3.4), OSE1 (22.9), OSE2 (0.8), Hercules (6.2), Mothers (13.3), and JASDAQ (10.8). The last of the  Nikkei indices, the Nikkei All Stock Index, is comprised of all stocks on Japan’s five stock exchanges: Tokyo, Osaka, Nagoya, Sapporo, and Fukuoka. Only JASDAQ is excluded.

Bibliography:     

  1. Edwin J. Elton and Martin J. Gruber, Japanese Capital Markets (Harper & Row, 1990);
  2. Chin-Tsai Lin and Yi-Hsien Wang, “The Impact of Party Alternative  on the  Stock Market:  The Case of Japan,” Applied  Economics (v.39/1, 2007);
  3. Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds (Harriman  House, 2003 [1841]);
  4. Nihon Keizai Shimbun, Nikkei Kaisha Joho (in Japanese) (Nihon Keizai Shimbun-sha, 2008).

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