Nikkei Index

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 r [Page 1214]ebalancing 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 Börse, 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.

...