Everything You Need to Know Before Trading Japan's Nikkei 225 (JP225)

Japan’s Nikkei 225 index was published in its current form for the first time on September 7, 1950. Regulated and maintained by Nikkei, Inc., the index is considered among the oldest in Asia. It is also the primary index of the Japanese stock market and a good indicator of the state of the nation's economy. It consists of 225 of the biggest companies, by market capitalisation, listed on the Tokyo Stock Exchange.

Often called Japan's Dow Jones, the Nikkei 225 or JP225 is a price-weighted index, just like the DJIA. The ranking of companies on the JP225 is based on their share prices, denominated in the Japanese yen. The components of the index are reviewed annually in September.

Trading hours for the Nikkei 225 index are from 11:46 pm to 6:24 am (UTC) and from 7:31 am to 5:54 pm (UTC), Monday to Friday.

The JP225 comprises stocks from 36 different sectors and lists some of the best-known companies in the world, such as Toyota Motor, Nissan Motor Corporation, Sony Corporation, Panasonic Corporation, Canon Inc. and Mazda Motor Corporation.

Factors the Impact the Nikkei 225

The first thing you should know before trading the index is that it is known for being one of the most volatile indices. It also tends to witness sharp price move. Also, since Japan is an export-oriented economy, with a large percentage of its exports being sent to the US, the JP225 tends to have a strong positive correlation with the US stock markets. In fact, traders tend to keep an eye on the Dow Jones Industrial Average, S&P 500 and Nasdaq while trading the JP225.

Also, Japan's export focus means that JP225 is impacted by the value of the yen. When the yen strengthens, the index tends to fall, while a weaker yen tends to lead to gains for the index. This is because exporters benefit from a weak yen when they convert revenue generated in other countries, especially the US.

Did You Know

The JP225 hit its lowest level of 85.25 in July 1950, while achieving its all-time record high of 38,915.87 in December 1989.

Some of the other key factors that influence the value of the index are:

1. Monetary Policies of the Bank of Japan (BoJ)

Monetary policy changes by the BoJ not only impact the economic policies of the Japanese government, but also influence the nation's financial system. So, announcements by the BoJ regarding policies can lead to significant moves in JP225. For instance, the index plunged 2.5% on December 19, 2022, its largest decline in over a month, following the BoJ’s announcement that it had doubled the cap on bond yields.

2. Economic Data

Traders keep a close watch on the economic calendar while trading the Nikkei 225 index because any economic data reflecting the state of the Japanese economy influence its movement. Some of the major economic indicators to keep an eye on are:

  • GDP figures
  • Trade balance
  • Industrial production
  • Employment numbers
  • Wage growth
  • Inflation
  • Retail sales data
  • The decisions of the BoJ regarding its monetary policy
  • The Tankan index (equivalent to the US manufacturing ISM)

Also, remember that news regarding the US economy also tends to move the JP225. So, it is useful to follow some of the key economic releases in the US, such as the NFP, GDP and monetary policy decisions by the Federal Reserve.

3. Geopolitical Events

Apart from political developments in Japan, global political events also impact JP225. For instance, the announcement of the Brexit vote in June 2016 led to major volatility in the index. The trade war between the US and China also impacted the Nikkei 225, as did the Russia-Ukraine conflict and the ensuing sanctions on Russia by the West.

4. Natural Disasters

Earthquakes occur frequently in and around Japan, damaging infrastructure and industries. This tends to adversely impact the Nikkei.

The Nikkei 225 shares a strong negative correlation with the Japanese yen. This means that the USD/JPY is positively correlated with the index. When the forex pair strengthens, the index tends to move up and vice versa. For instance, major Japanese auto manufacturer stocks tend to strengthen when the yen weakens against the US dollar.

How to Trade the Nikkei 225

Foreign investors cannot directly buy and sell stocks listed on the Tokyo Stock Exchange. So, the best way to gain exposure to the Japanese economy is through index trading. Again, since you cannot directly invest in the JP225, the easiest way is to trade the index via Contracts for Difference (CFDs). Since the index lists companies across multiple sectors, it offers a great way to diversify your portfolio. Also, the index is known for its volatility and good trading volume, offering multiple opportunities for CFD traders worldwide.

CFD trading also offers traders multiple benefits. Firstly, you don’t need to own the underlying asset to trade CFDs and neither do you need to deal with any stock exchange. Plus, with CFDs, you can trade both rising and falling markets, using the same trading strategies you would use with any other type of trading. So, you can go long or short, set your stop loss and take profit limits, using traditional technical and fundamental analysis tools.

Moreover, index trading with CFDs gives you access to leverage. This allows you to gain a much larger exposure to the market than you would with the capital in your trading account alone. However, remember that when you open a large position, you not only multiply your profit potential, but also magnify potential losses. So, choose your leverage carefully and after you have gained confidence in trading both indices and CFDs on a demo account.


To Sum Up

  • The Nikkei 225 index is the benchmark index of the Tokyo Stock Exchange and is considered the largest Asian index.
  • Also known as JP225, the index tends to follow the movements of US indices, such as the DJIA, S&P 500 and Nasdaq.
  • The index is negatively correlated with the USD/JPY. When the yen weakens, the index tends to rise.
  • The Nikkei 225 is also impacted by the monetary decisions of the BoJ, Japan's economic data, geopolitical events and natural disasters.
  • The easiest way to trade the index is through CFDs.



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