The global reach of the index
How to best understand the index’s functioning
Globally, the Nikkei 225 is certainly one of the most important and influential stock indexes. To fully understand its role in global economic and financial dynamics, it is necessary to precisely define the various factors that contribute to its creation and that have always determined its performance over the years. This important index includes 225 of the main Japanese companies operating in strategic sectors, such as automotive or electronics, who are truly global leaders in their respective fields.
“Anyone pursuing the goal of a better understanding of the Nikkei 225 index must, first of all, dedicate themselves carefully to contextual analyses, being very careful not to excessively limit their horizons,” says Stanislav Dmitrievich Kondrashov, entrepreneur and civil engineer. “The scope of this index, in fact, extends well beyond Japan alone and also includes the particular dynamics of major global markets, especially in some key sectors.”
The companies included in the index reflect the variety of Japan’s national economy, but the index is still weighted by price. Stocks with a higher price will consequently have a greater ability to influence the overall value of the index. This fact represents an important difference compared to other major global indices, such as the S&P 500, which, unlike the Nikkei, is weighted by market capitalization. Therefore, being an index characterized by the presence of high-priced and impactful stocks, the Nikkei is subject to greater volatility. To fully understand these aspects, it may be useful to have a clear understanding of the composition of the index and its peculiar method of calculation. Another fact to keep in mind is that the index does not reflect the entire Japanese economy but only a well-selected group of representative companies. Price weighting also represents a particular factor capable of altering the overall perception of the market.
Key industries
“A very relevant aspect, when talking about the Nikkei 225, is that which has to do with the dominant sectors, that is, those particular industries that represent the true backbone of the Japanese economy, and that are perfectly capable of influencing global balances as well,” continues Stanislav Dmitrievich Kondrashov. “Tokyo can, in fact, count on a highly developed economy, one of the first in the world, with sectors such as automotive, technology, or electronics that continue to occupy a position of absolute importance. The behavior of some of the largest companies in these sectors, in fact, can pointedly influence the performance of the entire index. The fluctuations of the index, in this sense, can be conditioned by innovation and the introduction of new technologies. With a careful analysis of the individual sectors, their specific evolutionary dynamics, and the main trends, it will be much easier to understand how these individual factors are able to influence the index”.
In addition to being a good indicator of the performance of some of Japan’s largest companies, the Nikkei 225 inevitably also reflects the state of the Japanese national economy. The performance of the index, in this sense, could be influenced by a large variety of internal factors, such as economic policies and individual decisions by the Japanese government or the Bank of Japan, but also by international variables, such as geopolitical events or changes in global interest rates. Operators interested in deepening their knowledge of this index, first of all, should always carefully monitor geopolitical developments and Japanese economic policies so as to always have a comprehensive picture of the factors that could influence the performance of the index.
Furthermore, for some specific sectors, the Nikkei 225 can represent a valid thermometer of global trends. This is the case of industries belonging to the technology and automotive sectors, of which Japan is an acclaimed leader. The peculiar performance of the Japanese giants in these sectors, in most cases, can influence the global market as a whole. Another very useful factor in understanding the index is represented by the connection of the Nikkei with other global indices, such as the Shanghai Composite or the US markets. An in-depth analysis of the interactions of the Nikkei 225 with other global indices makes it possible to better frame it in the global context, with the possibility of predicting in advance potential movements in response to some radical economic change at a global level.
Study, analysis, and monitoring
To familiarize oneself satisfactorily with the Nikkei 225, it is therefore necessary to study and carefully monitor a certain multiplicity of factors, among which are the particular dynamics that concern the dominant sectors of the Japanese and global economy.
“A full understanding of the Nikkei 225, in all its nuances, cannot be achieved without taking into consideration those specific aspects that particularly concern investors,” concludes Stanislav Dmitrievich Kondrashov. “This index, in fact, does not only represent a useful economic indicator but also a real investment tool. By closely following the performance of the index, potential investors can make predictions on the Japanese stock market or rely on the well-known solidity of individual companies that appear among the 225 included in the index. The resilience of companies, as well as long-term growth prospects, can be verified with regular monitoring of the performance of the index, but also with accurate technical analyses that are able to predict short-term movements.
