Nikkei 225: Understanding The Japanese Index, Significance and Derivatives

With globalisation, opportunities in every field have risen. Even the investment sector isn’t untouched. Investors today are aware that investing across countries diversifies their portfolio and may help them mitigate risk while pursuing potential gains.

As Japan plays an important role in the global economy, the Japanese stock market is one of the avenues that may be explored by investors. And to gain exposure to the Japanese stock market, Nikkei futures are widely used by global market participants.

In this article, we will learn about Nikkei, the history of this Japanese stock exchange, how an investor in India may gain exposure to the index, and key considerations for due diligence.

Table of contents

• What is Nikkei?
• History of the Nikkei 225 and Japan Stock Market
• Japan stock market — Nikkei opening time in India
• How to trade or invest in Japan stock market from India?
• Key considerations

What is Nikkei?

Nikkei is what investors commonly call Nikkei 225, which is the most referenced stock market index in Japan. It is maintained by the Nihon Keizai Shimbun, which is Nikkei’s financial newspaper. The index consists of 225 large, established companies listed on the Tokyo Stock Exchange (TSE). It is a price-weighted index, which means that companies with higher share prices have more influence on the index. In comparison, many indices in India, such as the Nifty 50 or BSE Sensex, are weighted by market capitalisation, meaning companies with larger market capitalisations get higher weights in the index.

History of the Nikkei 225 and Japan Stock Market

The Nikkei 225 is has been calculated daily by The Nihon Keizai Shimbun, commonly known as The Nikkei, since September 7, 1950. Being a price-weighted average index, the Nikkei 225 is reviewed semi-annually (in April and October) to ensure its components remain relevant to Japan’s evolving market landscape.

Recognised as one of the widely quoted benchmarks of Japanese equities, the Nikkei 225’s significance is similar to that of the Dow Jones Industrial Average in the US. Interestingly, between 1975 and 1985, the Nikkei 225 was known as the Nikkei Dow Jones Stock Average. Another prominent Japanese index is TOPIX (Tokyo Stock Price Index), which also tracks the broader market.

To facilitate international trading, Nikkei 225 Futures were introduced across multiple exchanges. It was first introduced on the Singapore Exchange (SGX) in 1986, followed by the Osaka Securities Exchange (OSE) in 1988 and later on the Chicago Mercantile Exchange (CME) in 1990.

The index reached an all-time high on December 29, 1989, peaking at an intra-day level of 38,957.44. Though that level has since been surpassed, this day remains symbolic of Japan’s asset bubble era.

Read Also: What is SGX Nifty (GIFT Nifty)? Meaning, Benefits & Impact

Japan stock market — Nikkei opening time in India

The Tokyo Stock Exchange (TSE) operates from Monday to Friday, with trading hours running from 9:00 AM to 3:00 PM Japan Standard Time (JST). There is a lunch break between 11:30 AM and 12:30 PM JST.

For investors in India, this translates to 5:30 AM to 11:30 AM Indian Standard Time (IST). This early schedule gives Indian traders and investors the potential advantage of tracking and reacting to movements in the Japanese market in real time, well before Indian stock exchanges begin trading.

How to trade or invest in Japan stock market from India?

Exchange-traded funds (ETFs)

ETFs are investment instruments that track an underlying index or basket of securities and are traded on stock exchanges like regular shares. Indian investors who wish to participate in Japan’s market through ETFs currently need to do so via international routes, as no Indian AMC offers a Japan-focused ETF at present.

To invest through ETFs, investors have to open an account with an overseas brokerage or a SEBI-registered intermediary offering access to international markets. Through this account, they can purchase Japan-focused ETFs managed by international AMCs, such as those tracking indices like Nikkei 225.

However, it is important to understand that such investments involve compliance with the Reserve Bank of India’s Liberalised Remittance Scheme (LRS), where Indian residents may remit up to USD 250,000 per financial year for permissible investments abroad.

Investors should also be mindful of:

The foreign tax obligations and double taxation avoidance rules, if applicable.

Currency conversion costs and transfer charges.

The potential volatility of Japanese equity markets and currency movements.

International mutual funds

International mutual funds are schemes offered by Indian AMCs that invest in overseas markets, often through a feeder or fund-of-funds (FoF) structure. These funds allow Indian investors to gain exposure to Japanese equities without opening foreign trading accounts or dealing directly in foreign currency.

The underlying fund, managed by a global AMC, may invest in Japanese companies or indices. Investors can subscribe in Indian rupees, and the AMC handles all cross-border transactions.

Before investing, it is important to note that:

Returns depend on both the performance of the Japanese market and currency fluctuations between the yen and the rupee.

Taxation follows Indian mutual fund rules; since these are treated as non-equity schemes, gains are added to the investor’s income and taxed as per applicable slabs.

Due diligence is necessary to assess fund objectives, costs, and historical consistency of returns.

Such funds may be suitable for investors seeking geographical diversification and willing to accept the risks associated with foreign equity exposure.

Direct investment in Japanese stocks

Some Indian brokers now allow investors to buy Japanese company shares directly, providing an opportunity to invest in firms listed on the Tokyo Stock Exchange (TSE).

• Open a global brokerage account: Choose a broker that supports trading in Japanese markets.
• Buy stocks: Invest directly in companies that are part of the Nikkei 225.

Read Also: What is Nifty: Meaning, Eligibility, Calculation and Benefits

Key considerations

Currency risk

Fluctuations between the Japanese yen and Indian rupee can impact potential returns.

Leverage and margin

Futures allow leveraged exposure, meaning you pay only a margin rather than the full value. While leverage may enhance potential gains, it may also increase the potential for significant losses.

Regulatory and tax risks

Taxation on capital gains from international investments may be different from those on domestic investments. Investors must check the latest tax norms and consult a tax professional for clarity before investing.

Time zones and trading hours

Because Japan is in a different time zone, you may face situations when market moves happen when your local market is closed. Investors should remain vigilant to overnight risks and global news.

Economic, political and market risks

Local (in Japan) as well as global developments in economy, monetary policy, inflation, corporate earnings, global trade and geopolitics may influence the index.

Conclusion

The Nikkei 225 offers investors an opportunity to participate in Japan’s market. For Indian investors, exposure can be gained through international ETFs, mutual funds, or direct investments via overseas brokers. Each route comes with its own considerations, including taxation, foreign exchange fluctuations, time zone differences, and regulatory requirements. As with any international investment, due diligence is vital to understand the associated risks and potential rewards. By aligning global exposure with one’s financial goals and risk tolerance, investors may use the Nikkei 225 as a gateway to diversify their overall portfolio.

Frequently Asked Questions

What is the Nikkei 225 and how many companies does it include?

Nikkei 225 is the most referenced stock market index in Japan, consisting of 225 large, established companies listed on the Tokyo Stock Exchange (TSE)

When was the Nikkei established, and how has its historical performance evolved?

The Nikkei 225 was officially calculated from September 7, 1950, with backward calculation to May 16, 1949. Hence, the base date for the index is May 16, 1949.

The index reached its all-time high on December 29, 1989, peaking at an intra-day level of 38,957.44, a record that remains symbolic of Japan’s asset bubble era.

What are the methods available for Indian investors to invest in the Nikkei 225?

Indian investors can gain exposure to the Nikkei 225 through Japan-focused ETFs managed by global AMCs. To do so, they need an overseas brokerage or SEBI-registered intermediary account, through which they may purchase Japan-focused ETFs after considering taxation, costs, and currency risks.

What are the risks involved in investing in the Nikkei, especially from an Indian investor’s perspective?

• Currency risk
• Leverage/margin risk
• Regulatory / tax risk
• Macro/political/economic risk

What factors influence the performance of the Nikkei 225?

Some of the factors that may influence Nikkei 225:

• Corporate earnings
• Monetary policy
• Inflation, GDP growth
• Global economic trends
• Currency movements
• Sector trends
• Geopolitical events

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.

The content herein has been prepared on the basis of publicly available information believed to be reliable. However, Bajaj Finserv Asset Management Ltd. does not guarantee the accuracy of such information, assure its completeness or warrant such information will not be changed.The tax information (if any) in this article is based on current laws and is subject to change. Please consult a tax professional or refer to the latest regulations for up-to-date information.