In the first quarter of 2024, the Japanese stock market was bullish, with the JP225 index rising 8.4% and 7.9% in January and February respectively, and breaking above the 40000 mark in March, breaking above the 34-year high. It also marked the Japanese stock market to break out of the darkness of the past 20 years lost. History.

The monetization effect that most catches the eye of investors. The performance of the Nikkei 225 index has led investors around the world to turn their eyes to the Japanese stock market. To understand the Japanese stock market, the most important thing is to analyze its market indices. That's more than we look at U.S. stocks, leaving the three major wind benchmarks on the S&P 500, Nasdaq and Dow Jones.

There are many indices in the Japanese stock market, including the Nikkei 225 Index, the TOPIX Index, the Japanese 500 Index, the Nikkei 300 Index, the TOPIX Core 30, the TOPIX Large 70, and the most widely known of which is the Nikkei 225 Index, and the most widely covered constituent stock is the TOPIX Index.

This article will focus on the Nikkei 225 Index and the TSO Index, including its formulation principles, industry distribution and constituent stocks, as well as related ETFs, etc.

History and Codification Principles of the Two Major Indices

First look at the Nikkei 225 index.

It is the oldest stock index in Japanese history, tracking the shares of the 225 most representative companies on the Japanese market. It was established by the Japan Economic News Agency and first published on September 7, 1970, using a price-weighted average calculation. With 16 May 1949 as the base date, the base point is 100 points. Counting this, the index has a history of more than 70 years.

The principles of the formation of the Nikkei 225 index are mainly embodied in:

First, liquidity. The stock price index is based on the stock price index of the 225 stocks with the most active trading volume and the highest market liquidity in the Tung Stock Prime listed stocks. The principle of choosing stocks based on liquidity is one to maintain the long-term continuity of the index, and two to reflect changes in the industry structure.

Second, price weighting. After selecting 225 stocks, you will be weighted according to the price of each share. That is, the higher the price of a stock, the greater the impact on the index. This is somewhat similar to the Dow Jones index in US equities.

Index Calculation (Calculation Formula)

JPY Average Stock Price Index = Σ Adjusted Share Price (225 units) /Number of Dividers

Adjusted Share Price = Stock Market Price (JPY) x Share Price Conversion Factor

Third, adjust the frequency. In principle, adjustments are made twice a year, usually in early April and early October, and the adjustment plan is announced in advance. With regular adjustments, it is possible to weed out stocks that do not meet the index's criteria and introduce fresh blood to achieve a winning edge of the index.

Let's take a look at the Eastern Securities index.

The Tokyo-based index was published by the Tokyo Stock Exchange on July 1, 1969, using the market capitalization weighting law. The base date was January 4, 1968, and the base point was 100 pips. The index has historically been 21 years lower than the JPY 225 index.

The main principles of TOSSE index formulation are reflected in:

1. Full coverage. The TOSCI index has previously covered all stocks listed on the Tokyo Stock Exchange (Main Board Market). Currently, it mainly covers the reformed Prime market. The total number of constituent stocks reaches more than 2100, with a market capitalization coverage of about 95% in all Japanese stocks.

2. Market capitalization weighting. The constituent stock weighting of the TSO Index, which is currently applied to the prevailing international market capitalization law, is that the greater the free floating market capitalization of the constituent stocks, the higher the weighting, but normally does not exceed 10%. In terms of relative price weighting, market capitalization is a bit more scientific, because in general, market capitalization is more representative of a company's overall strength. Companies that are stronger overall strength should have a stronger influence on the index.

Two major index industry breakdowns and top ten constituent stocks

In terms of industry distribution, the JPY 225 index is mainly divided into 6 sectors such as consumer, technology, finance, materials, etc. Of these, as of the end of February 2024, the total number of shares in the technology sector was 61, with a total weighting of 51.1%, which weighed heavily on the impact of the index. This is followed by the consumer sector, with 37 constituent stocks accounting for about 23.1%, and the weighting of technology and consumption reaching 74.5%. It can be said that investing in the JK225 index is basically equivalent to investing in technology and consumption in Japan.

As published on the official TSO Index website, the sector is divided into more than 20 sectors, including electrical appliances, services, machinery, etc. At the end of January 2024, the electrical industry represented by Sony was the first largest industry, weighing 17.4%, followed by the transportation equipment industry represented by Toyota cars with a weight of 8.7%. In third place is the information and communication industry, represented by telephone telegraphy in Japan, with a weighting of 7.5%.

In terms of constituent stocks, the largest weighting in the JPE-225 index was the parent company of Uyku, as its share price exceeded 4,000 yen, reaching 11%, and the weighting of the top ten constituent stocks was about 42.3%. It is worth mentioning that Toyota cars, the largest by market capitalization in Japanese stocks, still weigh less than 1%.

The largest weighting component of the TSO Index is Toyota Motor, with a weighting of approximately 4.55%, followed by Sony and Mitsubishi JPN, with a weighting of 2.87% and 2.31%, respectively, and the top ten components having a combined weight of about 20.8%.

Historical Trends of the Two Major Indices

The Nikkei 225 Index and the Tokyo-based index are important representatives of the performance of the Japanese stock market. The stock market is a harbinger of the economy, the history of the Japanese stock market and the change in interest rates in the Japanese economy.

Since the 1960s, Japan's economy has grown at a high rate, followed by the Nikkei 225 index and the Tokyo-based index. Entering the 1980s, Japan's low interest rate environment, which overlaid the yen's appreciation, began to spark an economic bubble that accelerated the rise of the two major indices. In December 1989, the JPN 225 index set a record of 38915.87 points and the TSO Index reached a high of 2886.5 points. The whole world was amazed by the wonders of the Japanese stock market.

However, since the 1990s, Japan's economic bubble burst, with large companies going bankrupt due to the effects of house prices, falling stock prices and the worsening economy, and the Nikkei 225 index and the Tokyo-based index plummeting by more than 50%.

Entering the 21st century, the United States suffered multiple terrorist attacks at the same time, plus the 2008 credit crisis, both major indexes were hit hard again, dropping to rock bottom in 2009. From 1990 to 2010, the Nikkei index fell for almost 20 years, a period also known as the “lost 20 years of the Japanese economy”.

It was not until Abe became Prime Minister for the second time in 2012 that the Japanese government proposed the “Three Arrows of Abe Economics”. The Japanese economy began to improve, prompting a sustained rebound in Japanese stocks. Japanese stocks have risen particularly rapidly in the last two years. In February 2024, the JP225 index breached 40,000 points, reaching a record high of 34 years later. The TSO Index reached a high of 2755, just a step away from its all-time high.

How to invest in two major indices?

The strong performance of the Nikkei 225 Index and the Tokyo-based index may leave some investors unnerved. So how to invest in these two major indices? Indices themselves are just a tool for tracking the market and cannot be invested directly. But investors can invest in the JPY 225 index through exchange-traded funds (ETFs), index futures, etc. Among them, large-cap index ETFs are a relatively common investment variety.

In the Japanese market, there are seven main ETFs tracking the Nikkei 225. On March 14, 2024, the total assets of these ETFs reached about 51.3 trillion yen, the largest of which is the NEXT FUNDS Nikkei 225 ETF, with an asset size of about 42.9 trillion yen.

THERE ARE SIX ETFS THAT TRACK TOPIX INDICES, WITH A TOTAL SIZE OF ABOUT ¥36.9 TRILLION, WITH THE LARGEST BEING THE NEXT FUNDS TOPIX ETF AT ¥22.3 TRILLION.

There are also 3 ETFs linked to Japanese stocks in the Hong Kong stock market, of which the Southern Nikkei 225 (3153.HK) tracks the Nikkei 225 index, while the other two are tracked separately by the MSCI Japan Index and FactSet Japan Global Leading Indices. There are currently no ETFs specifically tracking the TSO index.

Finally, to summarize,

The rise of the Japanese stock market caught the eye of investors around the world. To understand the Japanese stock market, you first need to understand its two major indices: the Nikkei 225 Index and the Tokyo-based Index.

The Nikkei 225 index mainly covers 225 stocks with strong liquidity in the Japanese stock market. It is calculated on a price-weighted basis and is adjusted every six months. The TOSS index mainly covers shares in the Prime market and is calculated on a market-weighted basis.

BOTH MAJOR INDICES ARE IMPORTANT REFLECTIONS OF THE JAPANESE ECONOMY AND HAVE ALSO EXPERIENCED MAJOR DECLINES AS THE JAPANESE ECONOMY FLUCTUATES. The Nikkei 225 index broke its all-time high in February 2024, while the TSO 500 index is also close to a new high.

Investors can invest in the Japanese stock market by tracking ETF products for two major indices. In the Japanese market, there are 7 ETFs that track the Nikkei 225 index and 6 ETFs that track the Tokyo-based index.