2024-03-01 00:04:00
Last week we presented here one of the worst indices in recent years, the Hang Seng index from Hong Kong. This week we will move to one of the best, which also comes from the Far East, the Nikkei 225 index – the leading index in the Japanese stock market, and the oldest index of Asian stocks.
Characteristics and criteria
The company that manages the index for the Tokyo Stock Exchange is Nihon Keizai Shimbun. The weight of the shares in the index is determined according to the share price, similar to the Dow Jones, and unlike most of the main indices that operate according to the market value method or the market value of the free shares. It was also formerly called Nikkei Dow Jones Stock Aberg (until 1985). This is not the only unusual thing in this index as we will see later.
The stocks selected for the index are blue chip stocks, meaning the stable and profitable large stocks of the Japanese stock market. In the international market, these companies are known mainly as strong brands in the field of automobiles, electronics and more – names like Sony, Nissan, Honda, or Canon, etc. The decision regarding the composition of the index, i.e. which stocks will enter or leave it, is made every year in September. The managers of the index aim to represent the Japanese economy as a whole.
The competing index is the TOPIX index which is built in the more conventional way according to the stock market value, and includes all the shares traded on the Tokyo Stock Exchange.
An extraordinary history
The historical behavior of the index is very different from parallel indices, at least in the last 40 years. According to most indices, they fluctuate between low and high tides in cycles of a few years, and usually rise over time at an average rate of 7% to 11% per year, some more and some less. The Nikkei index behaved as a fairly normal index until the eighties of the last century. Then the index jumped sharply in the Japanese property bubble, reaching a peak at the end of December of 1989. The screens showed 38,957.87 points at the end of the last trading day of that year, after having jumped 600% throughout the decade.
After that it began to decline steadily, until a low level of 6995 points in October of 2008 – 19 years after the peak. Even in the years after 2008, it faltered in the area of 8000 points, until it began to climb a little more consistently starting in 2013. Just a few days ago, on February 22 of the year 2024, it broke the record of 1989, about 34 years later . As mentioned, it is very difficult to find another example of an index that was below the record for such a long time.
Another unique feature The Japanese index is the fact that it has been influenced over the years in a decisive way by the activities of the Japanese central bank. The Central Bank of Japan, in cooperation with the various governments, has been pursuing for many years an extraordinary expansionary monetary and fiscal policy, which includes zero interest rates, control of the yield curve and a fiscal policy of very high debt and government incentives. All this to deal with the lack of growth in the aging country. As part of this activity, since December 2010 the bank has also adopted a policy of purchasing ETFs on the Nikkei index and other indices in the Japanese stock market (mainly the Topix index). The bank intervenes on days when market declines are recorded at the beginning of daily trading, thus supporting the depressed Japanese stock market and not letting it continue to fall.
The plan was accelerated in 2013 and some attribute to it the rally in Japanese stocks between 2013 and 2017. At the end of the period the bank owned about 75% of the units in all Japanese hedge funds and was among the 10 largest holders of about 90% of the shares in the Nikkei 225 index, in a kind of strange nationalization of the market Japanese shares. The purchase program continued in the years that followed, and estimates speak of annual purchases of between 4 and 7 trillion yen (27 to 47 billion dollars) per year in the years 2017 – 2020. In 2021, a decrease in purchases began due to a change in strategy that determined that only on days of sharp declines would the bank intervene in trade The bank has a plan to resell the shares at a rate of about 200-300 billion yen per year until 2025 as of now. So far in 2024 the central bank has not bought ETFs at all.
Due to this plan, unofficial estimates say that in 2023, the bank finally sold more shares than it bought. According to estimates, participation units in the ETFs were sold at a rate of about 300 billion yen compared to purchases of about 210 billion. The reason for this was the good performance of the index (an increase of about 28%), fueled mainly by foreign investors, so that purchases by the central bank were no longer needed to support the market. Despite the sales, the value of the ETFs on the central bank’s balance sheets is soaring due to the rise in Japanese stock prices in recent months. It now peaks at about 70 trillion yen (close to half a trillion dollars), of which 32 trillion yen is unrealized profits. The bank is still the largest holder of Japanese stocks. The central bank’s problem is that it doesn’t really know how to return to normalcy and get out of this hold. Some are talking about distributing the shares to Japanese citizens.
Key sectors and stocks
As of the end of 2023, the most significant sector in the index is technology with 24%, followed by cyclical consumerism with 21% and industry with 18%. The smallest sectors are infrastructure and energy with a few tenths of a percent (Japan does not produce energy itself but imports energy from around the world).
The stock with the highest weight in the index is Fast Retailing, a Japanese retail company with almost 11%. followed by Tokio Electron with 9%. The rest of the components with less than 5%. We will remind again that the weight in the index is not according to the size of the company but according to the share price. That’s why a giant like Toyota is worth 10 times more than the aforementioned companies with a weight of only 1.5%.
Performence
The last year was excellent for the index, mainly due to renewed interest in the international market in Japanese stocks. Berkshire Hathaway recently announced that it is investing in 10 Japanese stocks, and now it is already profiting on the investment by about 55%.
Japan is now Berkshire Hathaway’s largest investment country outside the United States. It should be noted, however, that the return is greatly affected by the exchange rates of the yen, which has weakened against the dollar in recent years, so that the dollar return (and the shekel as well) is lower than indicated in the table in front of you:
investment instruments
The dollar ETF that tracks the Nikkei 225 index is the MAXIS NIKKEI225 ETF (1346.T). In Japan, of course, there are many certificates that follow the index, that is, if you manage to grab a few units before the central bank buys everything. Among them, iShares Core Nikkei 225 ETF which charges 0.05% management fee, or Daiwa Asset Management ETF. There are also some European ETFs such as the iShares Nikkei 225 UCITS ETF (Acc). The Israeli ETF Kesem KTF 225 NIKKE also follows the index and charges a 0.55% management fee.
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