Nikkei VS TOPIX: Deciphering Japanese Markets And Indices

The Japanese stock market can be pretty confusing, especially when navigating the many indexes and stock exchanges. The reason for this is actually pretty simple, merger and acquisitions.

The stock market in Japan has undergone some massive changes over the past 20 years. It has consolidated 5 stock exchanges down to just one, the TSE, also known as the Tokyo Stock Exchange. The TSE is essentially run by the JPX or Japan Exchange group, and the confusion lies in the market divisions that were created when the cash equity markets were integrated.

This also led to some confusion on stock market indices and as a result led to multiple indexes tracking essentially the same stocks. while at the same time leaving out many others.

The TOPIX and Nikkei are the two major stock indices in Japan. Together, with their sub indices they track large Japanese listed stocks. The Nikkei is price weighted, while the TOPIX is cap-weighted. The JASDAQ and JPX-Nikkei indices track unique data points and markets.

Japan is on the brink of a major restructuring that could provide ample opportunities to invest in newly created indexes. In order to understand why, we need to take a look at some of the popular indices that many ETFs track today.

The Nikkei 225 and the Oldest Index in Japan

When you often hear about how well the Japanese stock market is doing on the news they are often referring to the Nikkei 225. The Nikkei 225 tracks some of the largest Japanese companies over a wide array of sectors. It seems to operate much like the DOW but with more companies being tracked.

The index is price weighted and thus is an average of all of its members rather than weighted towards the largest companies in the index. This allows smaller companies by market cap to have a bigger weighting in the index.

In my opinion its possible that the large emphasis on this index worldwide may be the reason many Japanese companies choose not to to split shares. Since a company with a higher share price will receive a higher weighting on the index.

There are many sub indices in the Nikkei that track different parts of the over 3,700 listed stocks on the Japanese market.

Index NameDescriptionIndex Funds
Nikkei 225Tracks 225 largest price weighted stocks in Japan.EWJ, DXJ
JPX-Nikkei 400 Tracks 400 companies based on efficient use of capital, often referred to as the shame index. JPXN, HJPX
Nikkei 300This stock index was created to represent the Japanese stock market as accurately as possible with a smaller number of stocks. It is market value weighted and includes stocks with large market values in 36 industrial sectors. Japanese only
Nikkei 500The Nikkei 500 is a price-weighted stock index. Instead of being weighted by the overall value of the company as is in the Nikkei 300, the Nikkei 500 is based on the actual share price of the stock. Japanese only
Nikkei JQ AverageThis index is exactly the same as the Nikkei 225 index except it includes stocks from the JASDAQ and the Tokyo stock exchange. NA
Nikkei Volatility This index uses stock futures in the Nikkei 225 in order to track volatility of the index. In the event of a market crash the volatility skyrockets. NA
Table of Nikkei Indices and American ETF’s that track them. Not all ETF’s are listed.

Only the major internationally focused indexes have American centered ETFs. All indexes above have Japanese ETFs that focus on the indexes, you will just need to convert your money to the Yen in order to buy them.

JPX-Nikkei 400 and Corporate Governance

Not all index’s are created with the idea of just tracking company metrics and gauge the health of a market. The JPX-Nikkei 400 nicknamed the shame index was created to make the rest of the Japanese stock market do better in terms of return on capital.

Public Japanese companies have for the longest time hoarded cash leading to terrible use of capital. This has frustrated and driven away many international investors, leading to a stagnate economy.

This index focuses on efficient use of capital and investor focused management. It attempts to revitalize the Japanese stock market.

The TOPIX a More Accurate Representation of Japanese Markets

The TOPIX was created after the Nikkei in the year 1969. It was created as a market cap weighted index to be a more accurate representation of the Japanese stock market.

It incorporates free float into its weighting as a way to exclude cross company held shares. Cross company holdings, known as Keiretsu, is a sign of respect when companies formed business partnerships. It may also be what creates less volatility in small cap stocks.

The TOPIX more closely equals the Nasdaq whereas the Nikkei represents the DOW in Japan. Below are some sub indices of the TOPIX.

The TOPIX has too many indexes to name, but some of the more common ones include:

  • TOPIX 30
  • TOPIX 500
  • TOPIX 1000
  • TOPIX 100

These indexes track anywhere from 30 to 1000 different stocks that are included in the stocks that the TOPIX can derive companies from. This includes only stocks in the first section of the TSE which includes around 2,200 companies. Only two-thirds of the total available stocks in Japan.

For more information on the TOPIX refer to the JPX website.

The JASDAQ a Pioneer and soon to be Relic

JASDAQ is known as a small stock market for small domestic markets. Sony, Honda and Softbank were once listed on it but since they got big enough they switched to the Tokyo Stock Exchange. Some would like it to become the Nasdaq of Japan.

However, it seems like its days are numbered. Since the large consolidation of exchanges in Japan it has now become a part of the JPX and will soon cease to exist when the new JPX market segments are created in April 2022. It will be assimilated into the new prime, standard and growth segments.

The JASDAQ consists of both Standard and growth stocks and only tracks the 700 companies currently listed under it on the TSE. This market index will likely soon cease to exist.

Japanese REIT Indexes

Japan has REITs that are specifically in REIT indexes. If you want exposure to the Japanese real estate market it is important to invest in them individually. The TOPIX index excludes REITS so an investment in the TOPIX will exclude any Japanese REITS.

Other Japanese Derived Indices

There are far to many indices to name them all here but just like in the United States there is literally and index for everything. These indexes track the following:

  • Bonds.
  • Commodities.
  • Foreign equity.
  • Market sector equities.
  • Dividend indices.

If you want a full list of purchasable indices and their corresponding funds check out the list here.

Final Thoughts on Japanese Markets and Indices

After trying to figure out the wild world of Japanese market indexes I now realize why its often considered too large and confusing. It really is a mess and thankfully they are taking steps to resolve this by consolidating it down to three components.

This will help companies list on the Japanese markets with less confusion and create a much less confusing way to invest in parts of the Japanese market. It may also allow the TOPIX and the Nikkei to draw from all Japanese equities instead of just a few sections, brining more obscure stocks to light.

The change coming to Japanese indices in 2022 is just another reason the Japanese stock market is going to experience a renaissance and recover from its lost decades.

Bryan Shealy

Bryan Shealy is an active value investor. He currently focuses on the small and micro cap stock market looking for bargains. He has written content for Seeking Alpha, Net Net Hunter and Broken Leg Investing.

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