When UK traders wake up, Japan’s stock market has already done most of its day’s work. The Nikkei 225 is the headline index for Tokyo shares and one of the first signals of how global markets are feeling. On days when it moves sharply, as it did this week on optimism about artificial intelligence and cheaper oil, it often sets the tone for Europe’s open.
What the Nikkei 225 is
The Nikkei 225 tracks 225 large companies listed on the Tokyo Stock Exchange. It is published by Nikkei Inc., the Japanese media group behind the Nikkei newspaper, and it has been calculated since 1950. The members include household names in cars, electronics, banking, retail and industry.
Why it behaves differently from other indices
The Nikkei is price-weighted, like the Dow Jones Industrial Average in the US. That means companies with higher share prices have more influence on the index, regardless of how big the company actually is. A handful of high-priced shares, including several technology and chip-related names and the owner of the Uniqlo clothing brand, can drive a large part of the daily move.
Most other major indices, such as the FTSE 100 or the S&P 500, are weighted by market value instead. Japan also has the Topix, a broader market-value-weighted index of Tokyo shares, which some investors prefer for a cleaner picture of the whole market. Our guide to the Dow Jones Industrial Average explains price weighting in more detail.
What moves the Nikkei
The yen is the big one. Many Nikkei companies earn a large share of their profits abroad. When the yen weakens, those overseas earnings are worth more in yen, which tends to lift their shares. When the yen strengthens sharply, the opposite often happens. Our explainer on USD/JPY covers why traders watch the currency so closely.
Global technology is the second driver. Japan is home to important suppliers to the chip industry, so strong news about AI spending in the US tends to lift Tokyo quickly.
The Bank of Japan is the third. After years of ultra-low interest rates, any sign of further rate rises can strengthen the yen and weigh on exporters, while changes in its bond buying affect the whole market.
Why UK traders watch it
Because Tokyo trades while London sleeps, the Nikkei gives an early read on how markets have digested news from the US session. A strong Nikkei after a good night on Wall Street confirms the mood. A weak Nikkei despite a good US session can be a warning that the rally is not spreading. Our guide to the Asian trading session explains how that overnight handover works, and the KOSPI covers South Korea’s equivalent.
How to trade around it sensibly
Nikkei futures and index products are available to UK traders through many brokers, often in yen or with currency risk attached. That means a trade can be affected by the yen as well as the shares. Beginners should be aware that Japanese markets can move sharply on policy surprises from the Bank of Japan or on currency intervention by the government.
For the latest on how Tokyo and Seoul are trading, this morning’s Morning Market Brief has the overnight picture. If you want to understand your own approach before trading an overseas market, the free Samuel & Co Trading Trader Assessment is a good place to start.
