The Nikkei 225 is Japan's premier stock index, tracking 225 large companies listed on the Tokyo Stock Exchange's Prime Market. Created on September 7, 1950 (retroactively calculated to May 16, 1949), it is compiled by Nihon Keizai Shimbun (Nikkei Inc.), Japan's leading financial newspaper. Like the Dow Jones, it uses price-weighted methodology.
Why It Matters
Japan is the world's third-largest equity market by capitalization (~$6 trillion). The Nikkei 225 is the most recognized benchmark for Japanese equities globally. Key sectors include automotive (Toyota, Honda, Subaru), electronics and precision instruments (Sony, Keyence, Tokyo Electron), trading houses (Mitsubishi Corp, Mitsui, Itochu), and financials (Mitsubishi UFJ, Sumitomo Mitsui).
Price-Weighted Quirks
Like the Dow, the Nikkei is price-weighted -- stocks with higher share prices have more influence regardless of company size. A company like Fast Retailing (Uniqlo parent, ~Β₯35,000/share) has far more index impact than Toyota (~Β₯2,500/share) despite Toyota being much larger by market cap. This methodology is a frequent point of criticism.
The Lost Decades & Recovery
Yen Correlation
The Nikkei has a strong inverse correlation with the yen -- a weaker yen boosts export earnings (translated back at favorable rates), lifting the index. USD/JPY moving from 140 to 150 can add 5-8% to Nikkei valuations. This relationship makes BOJ policy the single most important driver of the index.
Warren Buffett Effect (2023-)
Berkshire Hathaway's disclosure of significant positions in Japan's five major trading houses (Mitsubishi, Mitsui, Itochu, Marubeni, Sumitomo) in 2023 drew global investor attention to Japanese equities, contributing to the rally that broke the 1989 record.
Corporate Governance Reform
The Tokyo Stock Exchange's 2023 push for companies trading below book value (P/B < 1) to improve capital efficiency has been a major catalyst. Many Japanese companies responded with share buybacks and increased dividends, narrowing Japan's historical valuation discount.