A Review Of The Nikkei 225 Index

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Video Transcription:

Hello traders, welcome to the stock trading course and the second module: stock market indices.

In this lesson we are going to review the Nikkei 225, and as you might imagine by its name, we are going to go to Japan for this lesson. So let’s define what the Nikkei is. The Nikkei is a stock index comprised of Japan’s top 225, or Japan’s top 225 blue chip companies on the Tokyo stock exchange. Even though it’s calculated with the top 225 companies of the Tokyo stock exchange, the Nikkei is the equivalent of the Dow Jones Industrial Average of the United States. It was actually called the Nikkei Dow Jones Stock Average from 1975 to 1985, so that’s a little bit of history on the Nikkei and let’s break it down.

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This is a price weighted index and it has been calculated since September, 1950. This index deviates from the textbook model of stock averages where they grow at a steady rate, as we have seen with the Dow Jones Industrial Average, the S&P 500, the NASDAQ, etc., they all grow steadily, they all have been in a steady boom market for decades. The Nikkei 225 deviates from this model. And I’m going to go through a little bit of history on the Nikkei so you can see how it deviates from this model.

Unlike the other stock indices that we have seen so far, the Nikkei hit its all-time high in December, 1989, at a level of 38,957 points during the peak of the Japanese asset bubble. And for you that don’t know what the Japanese asset bubble is, well it was an economic bubble in Japan from 1986 to 1991, in which real estate and stock market prices were greatly inflated.

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After this, the index lost almost all of its gains closing at a low of 7,054, in March, 2009. And this is a drop of 81.9% from the highest. So when the bubble burst, it sent the Nikkei down 81.9% from the all-time high in December, 1989. So the Nikkei dropped more than 31,000 points in 10 years and this is what is called the lost decade in Japan. The Nikkei is a very volatile index and it’s also very affected by natural disasters such as the earthquake in Japan in 2011 when it dropped more than 10% in a single trading day.

Now the Nikkei is the benchmark for the overall sentiment of investors towards the Japanese economy. And if you look at this daily chart of the Nikkei 225, you can see that it doesn’t grow in a steady rate like the other indexes. For example, right here from these highs at 18,306 to the lows at 7,000, the index dropped 61.72% in about two years. I’m sorry, in about a year and a few months. And then it continued to trade steadily before going on an impressive boom market from this lows to the highs that we just saw around the 21,000th level.

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Now when we are talking about volatile, or volatility in this index, you can see that we have a huge gaps on a daily time frame, such as the DAX for example. For example right here we have a gap of 1.55% okay? So that’s an impressive gap on a daily time frame. And as you can see here…well, this drop on the Nikkei was due to the bad news from the Chinese stock exchange. But in any case, it dropped around 15.34% in a couple of days. So this index is affected a lot by external influences and is also very volatile. And as you can see, it doesn’t grow steadily. So it is very…well, just by looking at the overall price action of the Nikkei, it was very, very tough to invest in Japanese stock during this period, and of course during the last decade.

Now that we have entered a boom market, we can start looking at some potential investments in the Japanese economy after this corrective move to the down side in a nice hold of the 17,000th level.

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