Nikkei 225: The First Step into Investing in the Japanese Stock Market

What is it? Why is it important?

The Nikkei 225 Index is the most significant indicator of the Japanese stock market. It comprises shares from 225 leading companies listed on the Tokyo Stock Exchange, ranging from historic firms like Hitachi, Toyota, Panasonic to modern technology companies.

To make it easier to understand, think of the Thai SET50 index; the Nikkei 225 is similar but covers a much larger number of stocks, providing an accurate reflection of Japan’s overall economy.

A Long History

The Nikkei 225 is the oldest stock index in Asia, dating back to September 7, 1950 (B.E. 2493), and continues to this day. Its calculation actually goes back to May 16, 1949, when the Tokyo Stock Exchange reopened after World War II.

Initially, the Tokyo Stock Exchange calculated the index until 1970 (B.E. 2513), after which Nihon Keizai Shimbun (The Nikkei) took over the calculation and reporting responsibilities, continuing to the present.

Memorable Highs and Lows

• Highest: 38,916 points (December 1989) during the bubble era
• Lowest: 7,568 points (February 2009) after the Subprime Crisis
• Current (December 18, 2025): 49,512.28 points, up 0.26%

These figures tell us that the Japanese market is highly volatile with greater profit potential.

How much weight does each sector have?

As of December 18, 2025, the Nikkei 225 index is dominated by the technology sector (52.03%), followed by Consumer Goods (22.36%) and Materials (12.69%).

Sector Distribution

The technology group includes pharmaceuticals, electrical machinery, automotive parts, precision measurement tools, and communications.

Meanwhile, finance and utilities account for only about 2% of the total index.

Calculation Method: Simplified Explanation

The Nikkei 225 is a price-weighted index calculated from 225 stocks every 5 seconds during trading hours.

Calculation Steps

1. Adjusted Stock Price = Stock Price × Price Adjustment Factor (PAF)
2. Index Value = Sum of adjusted prices ÷ Divisor (Divisor)

The PAF system has been officially used since October 2021 to ensure stock prices are comparable and reasonable.

Before that, Nikkei used a “presumed par value” system to adjust prices to equal 50 yen, but Japan abolished the par value system in October 2001.

Which stocks are included in the index?

Stock selection for the Nikkei 225 uses two methods:

( 1. Annual Review )Periodic Review###

Held twice a year in January and July, effective in April and October.

Highly liquid stocks are included, while less liquid stocks are removed.

Liquidity is measured by:

• Total trading volume
• Price volatility

( 2. Special Replacement )Extraordinary Replacement###

Used when a stock is delisted due to mergers or moving to another exchange.

New stocks are selected from the same industry to maintain balance.

( Selection Policy

Nikkei emphasizes two factors:

• Liquidity: to ensure efficient trading
• Industry Balance: to make the index a good representation of the Japanese economy

What factors drive the price?

Observing the following factors can help better predict movements of the Nikkei 225:

) 1. Global Economy, especially the US and China

Japan relies heavily on exports. The US and China are key trading partners, so their economic conditions directly impact Japan.

2. GDP and Growth

If Japan’s economy grows well, companies will profit more, positively affecting stock prices.

3. Monetary Policy

Low interest rates reduce operating costs, increase corporate profits, and boost stock prices.

4. Fiscal Policy

Heavy government investment and low taxes stimulate the economy, especially in supported industries.

5. Industry-specific Sentiment

Changes in economic structure, new policies, consumer behavior, and competition affect each sector.

The technology industry ###which accounts for nearly half of the index### may be affected by inflation and trade restrictions.

( 6. Company Performance

The most critical factor, based on profits of the 225 companies.

) 7. Yen Exchange Rate

Yen appreciation → Japanese goods become expensive → sales decline → stock prices fall

Yen depreciation → Japanese goods become cheaper → sales increase → stock prices rise

8. Oil Prices

Japan imports a lot of oil. High oil prices → increased production costs → reduced profits

Why do investors invest in the index?

1. Access to Major Japanese Companies

Instead of buying individual stocks, investors can invest in the Nikkei 225 index if they expect Japan’s economy to grow.

2. High Liquidity

The stocks in the index are actively traded because they are selected for high liquidity, resulting in narrow bid-ask spreads and less price impact.

3. Diversification

Investing in the Nikkei 225 index instead of individual stocks or investing abroad to diversify country risk.

If the Thai market faces issues, the SET50 index might decline, but the Nikkei 225 may remain unaffected.

However, the Nikkei 225 is highly volatile. Short-term traders need to monitor the market closely, but this volatility also offers more profit opportunities.

How can you invest in the Nikkei 225 index?

1. Exchange Traded Fund ###ETF###

Many securities companies and asset management firms offer funds tracking the Nikkei 225, such as KT-JPFUND-A by Krung Thai Asset Management or TMPJE by TMBAM Eastspring.

Advantages: Diversification, low fees

Risks:

• Issuer risk
• Liquidity risk
• Currency risk

( 2. Contract for Difference )CFD###

CFD is a derivative that allows profit from index movements without owning the actual stocks, by posting a margin.

Example: With a 1:100 margin, depositing 100 baht allows speculation on an index value of 10,000 baht.

How it works:

• Expect the index to rise → buy CFD
• Index rises → sell and profit
• Index falls → incur loss and pay the difference

Advantages: Low capital requirement

Risks: Very high risk; small fluctuations can quickly wipe out margin, forcing closeout or resulting in large losses, unlike ETFs which have lower risk.

Usage: Can be traded via various trading platforms offering CFD services.

Summary: The Nikkei 225 provides investors with various ways to access the Japanese stock market, whether through ETFs for long-term, low-risk investment or CFDs for short-term, high-risk trading. Ultimately, your choice depends on your investment goals and risk appetite.