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Nikkei 225 Stock Average

  1. Characteristics of the Nikkei Stock Average
  2. April 2000 Revision
  3. Calculation Method
  4. Nikkei Indices Chronology
  5. History of Nikkei 225 Component Changes
  6. Divisor - Current Value
  7. Questions From NNI Subscribers
  8. Companies with Irregular Par Values or Trading Units
  9. Top 10 Percentage Gains in Nikkei Stock Average
  10. Top 10 Percentage Falls in Nikkei Stock Average
  11. Latest Reconstitution (Dec. 8, 2008)
  12. Revisions of the Nikkei Indices Selection Rules (Jan. 17, 2002)
  13. Nikkei 225 Constituents

1. Characteristics of the Nikkei Stock Average

The Nikkei Stock Average is Japan's most widely watched index of stock market activity and has been calculated continuously since September 7, 1950. (Before that date, the Tokyo Stock Exchange calculated the Tokyo Stock Exchange Adjusted Average Stock Price, so index-based measurement of the market actually goes back to May 16, 1949.)

The current calculation method, called the Dow Jones method, has been used since 1950. The 225 components of the Nikkei Stock Average are among the most actively traded issues on the first section of the TSE. The index reflects the ex-rights-adjusted average stock price.

Since the Nikkei Stock Average is expected to represent the performance of stocks on the first section -- and by extension the market in general -- the mix of components has been rebalanced from time to time to assure that all issues in the index are both highly liquid and representative of Japan's industrial structure.

The previous round of rule changes governing deletion and addition of components took place in October 1991. The revisions mandated replacement of issues whose trading volume had declined considerably with highly liquid alternatives, all with an eye to maintaining balanced representation by the various industrial sectors. Japan's economic and industrial environment has changed rapidly over the past 10 years and activity in the stock market has reflected this.

In recent years, the pace of change has accelerated. Notably, an entirely new industry has emerged around information technology (IT). During this period of change, Japan has been suffering through a protracted recession characterized by sluggish capital investment and weak consumer spending.

These circumstances have resulted in a situation where lines are being clearly drawn between winners and losers, and these corporate strength differentials are driving a wave of mergers and acquisitions. A state of bi-polarization has thus come to shape the stock market.

In response to these changes, Nikkei in October 1993 introduced the Nikkei 300 (Nikkei Stock Average of 300 Selected Issues), a weighted average based on market capitalizations of 300 component stocks. This was followed in June 1998 by the launch of Nikkei Style Indexes (Value and Growth), which was created to recognize diversification in asset management styles.

The debut of new indices illustrates Nikkei's recognition of the need to measure stock market performance from a variety of perspectives. At the same time, however, we constantly assess our benchmark Nikkei Stock Average to assure that it accurately reflects changes in industry and market structures.

The Nikkei Stock Average has now come to play a much larger role than simply measuring the market level and reflecting trends. Use of the average as a base for futures and other index-linked derivatives, for example, is just one of a growing range of applications.

It was these changes in the industrial and investment environments that necessitated revisions to the rules covering selection (addition and deletion) of index components. The goal was to assure continuity of the basic philosophy of using "225 Selected Issues" to accurately represent Japan's economic conditions.

In modifying the selection rules, Nikkei used input from the Index Committee, a closed group of academics and professionals formed to review the index. Revisions to the selection criteria led Nikkei to replace a relatively large number of issues in an effort to make sure the Nikkei average accurately reflected structural changes in industry and the stock market. Adherence to the principals governing calculation of the index ensures historical continuity -- one of the most important characteristics of the Nikkei Stock Average.


2. April 2000 Revision

2-1. Major Points of Revision

The concepts of "Periodic Review" and "Extraordinary Review" were redefined, and timing for the reviews was changed. The primary purpose of the Periodic Review is to annually reconsider component issues from the standpoint of changes in the industrial and market structures. The Extraordinary Review is for deleting and adding components in response to extraordinary developments, such as bankruptcies or mergers.

(1) Periodic Review Standards

In principle, the Periodic Review shall be conducted annually in October in line with the rules set down.

The Periodic Review may, however, be carried out more than once a year if necessary. Despite the special circumstances this year -- the approval of changes in rules and their April implementation -- the Periodic Review is still scheduled for early October.

(2) Active Approach To Deletions/Additions

The most important aspect of the new changes is that the Periodic Review process will be carried out in a far more comprehensive and dynamic manner. The rules previously required replacement of an issue if liquidity had declined significantly, or if a company was delisted.

The revised rules call for a more active approach to deletions and additions by requiring consideration of changes in the industrial structure and market environment, in addition to liquidity. In view of the desire for a more dynamic review process, no limit is placed on the number of issues that can be replaced.

(3) Assessing Liquidity

While the principle of favoring highly liquid stocks has been maintained, the yardstick for assessing liquidity has been revised. The former measures of "Trading Volume" and "Price Fluctuation to Volume" were replaced by "Trading Value" and "Rate of Price Fluctuation to Volume."

The new measures are seen as better gauges of liquidity because they combine Trading Value, a measure that is winning greater acceptance as a standard for measuring turnover, and Rate of Price Fluctuation to Trading Volume, which is seen as a more rational measure in view of the increase in the number of high-priced issues.

Trading Value is calculated by multiplying the average of four prices (open, high, low and close) by number of shares traded. The period over which liquidity is measured has been shortened to five years, from 10. The primary reason for this is to keep tracking changes in the market as closely as possible while eliminate the impact of factors that temporarily increase liquidity in the market.

(4) Selection of Highly Liquid Stocks

The practice of assigning highly liquid stocks to the "High-liquidity Group" has not changed. Formerly, all stocks on the first section of the Tokyo Stock Exchange were ranked in order of liquidity and the top 50% were considered high-liquidity issues. This approach has been replaced with one in which the 450 most liquid issues are chosen (a figure double the 225 component stocks of the index).

The approach of selecting the top 50% was abandoned because the number of issues listed on the first section of the TSE is growing and there was concern that the method would not result in a list representative of highly liquid issues. A predetermined figure that limits the population to a number double the component count was considered to be more practical and reasonable.

(5) Mandatory Deletion/Addition

The rule mandating deletion of issues that fall outside the high-liquidity group remains unchanged.Since the high-liquidity group is now limited to 450 stocks, all issues ranked 451 and below are automatically excluded.

There are now about 1,700 companies listed on the first section of the TSE, so the group of high-liquidity issues has effectively been reduced from 700 to 450.The change has made it more difficult for some issues to get selected for inclusion in the Nikkei average.

Another important change involves elimination of the rule stating that only six issues could be removed from the index in a single review period.This was replaced by a rule requiring that the 75 most liquid issues (one-third of the component count of the Nikkei average) be included in the index.This rule change, which was made to reemphasize the importance of liquidity, resulted in inclusion of 10 firms that were not previously among the 225 selected issues at the April 24 review.

When the next review is conducted, these 10 issues will be retained as index components even if they no longer rank among the 75 most liquid issues, so long as they still rank in the top 450 and meet the "Sector Balance" criteria discussed below.

(6) Deletion/Addition Based on Sector Balance

A new concept based on six industrial sectors was adopted with the current set of revisions.This was accomplished by consolidating Nikkei's 36 industrial classifications into six: Technology, Financials, Consumer Goods, Materials, Capital Goods/Others, and Transportation/Utilities.Component stocks of the Nikkei average are balanced among these six sectors.

Choice of the sector approach reflects a belief that actively rebalancing component stocks from a broader perspective is appropriate to accurately represent dynamic changes in the industrial structure.Procedures for inter-sector rebalancing are as follows.

(a) The 450 high-liquidity issues are classified into the six sector categories.Half of the number of issues in each sector will be considered "Appropriate Number of Issues" for the sector to be included in the index.This percentage reflects the fact that the number 450 is double the number of Nikkei average components.

(b) The rule discussed in (5) is applied to the Appropriate Number of Issues to show if too many or too few have been chosen.For example, if the number of issues appropriate for a sector is 30 and the actual number of issues obtained after applying the rule in (5) is only 28, then two issues will be added to bring the sector's count to 30.

Adjustments will be made for excesses or shortages in each sector as follows.If the number of companies for a specific sector in the top 75 most liquid issues that will be automatically included in the 225 components excesses in the Appropriate number of Issues for a sector, the excess is ignored and all issues are initially included.

(c) The excess in a sector resulting from automatic inclusion as described above is adjusted by removing an equivalent number of issues from the sector, starting with the issue exhibiting the lowest level of liquidity.

(d) Shortage will be filled up by adding an equivalent number of issues from among companies currently excluded, starting with the issue exhibiting the highest level of liquidity.

This sector-based breakdown and the underlying industry classifications may be modified to reflect changes in the industrial structure.The 36 Nikkei industrial classifications included in the six sector categories are as follows:

Technology -- Pharmaceuticals, Electrical machinery, Automobiles, Precision machinery, Telecommunications

Financials -- Banks, Miscellaneous finance, Securities, Insurance

Consumer Goods -- Marine products, Food, Retail, Services

Materials -- Mining, Textiles, Paper & pulp, Chemicals, Oil, Rubber, Ceramics, Steel, Nonferrous metals, Trading House

Capital Goods/Others -- Construction, Machinery, Shipbuilding, Transportation equipment, Miscellaneous manufacturing, Real estate

Transportation and Utilities -- Railroads & Buses, Trucking, Shipping, Airlines, Warehousing, Electric power, Gas

2-2. Extraordinary Deletion

Basically, the rule requiring that a component stock be deleted when it is removed from the first section of the TSE (that is moved to the Liquidation post known as "Seiri Post") , delisted due to a merger or insolvency (insolvency is assumed when a company files for protection from creditors) or singled out for some other extraordinary reason has not been changed.

A component stock moved to "Kanri Post" (Post for stocks under supervision) is in principle a candidate for deletion.

Stocks are moved to Kanri Post for a variety of reasons, including likely delisting or during a temporary period of investigation and monitoring.In such cases, the decision to delete a stock from the average will depend on circumstances particular to the issue in question.

If one or more component stocks is deleted from the average, the schedule for filling the resulting opening shall be as follows:

(1) The "Shortage Ratio" was used previously for choosing the issue to replace a deleted component, with priority given to the most underrepresented industrial classifications.The new Periodic Review system focuses on the sector with the vacancy and requires selection of the stock with the highest liquidity among sector issues that have not been included in the average in the past. Given one deletion in financials, a newly-selected issue will come from financials.

(2) As a rule, replacement will be effective on the day an opening emerges.If a component is moved to Seiri Post, the change goes into effect on the day the issue is moved.

If a vacancy develops suddenly on a day the market is closed, a certain interim period may be allowed before the opening is filled.This would be done so that the date and details of replacement could be announced ahead of time.The rule would be used in cases where a company files for protection under the Corporate Reorganization Law at night or on a public holiday.

2-3. Other Revisions

Modifications to the mix of index components was alsomade in response to changes in the stock market or industrial environments.

(1) The rules under "Exceptions to Addition Policy" and "Special Additions" have been abolished.Exceptions to Addition Policy rules stated that companies qualifying for an exceptional addition had to be listed on the first section of the TSE for more than 3 years and have a float exceeding 6 million shares.Special Additions rule stated that a firm considered representative of its industry by TSE would be included.

(2) Some companies may be delisted as they move forward with restructuring or diversification programs.In such cases, component issues will be replaced in accordance with the following procedures, depending upon the nature of the reorganization.

Replacement procedures will not be implemented immediately but held pending until the next Periodic Review so that liquidity can be monitored around the time of the reorganization and the new entity's status measured in terms of its being representative of its industry.This means that the delisting process will be handled as before.

It should also be noted that in the following cases, the issue may not necessarily be included at the next Periodic Review.

(1) If a non-component issue becomes the surviving entity in a merger between TSE first section companies, and the current component issue is the company absorbed by the surviving entity, the surviving non-component issue may be included in the index.

(2) When a component issue is delisted following the formation of a holding company (including formation of a holding company by several listed firms) , the newly established "Holding Company" may be included as an index component.


3. Calculation method

The Nikkei Stock Average is the average price of 225 stocks traded on the first section of the Tokyo Stock Exchange, but it is different from a simple average in that the divisor is adjusted to maintain continuity and reduce the effect of external factors not directly related to the market.

(1) Equation

Nikkei Average = Sum of stock prices of 225 constitutents

Divisor

a) Stocks that do not have a par value of 50 yen are converted to 50 yen par value.
b) Numbers are rounded to two digits after the decimal point, or hundredths, to calculate the average.
c) Priority in the usage of prices are:

1. Current special quotation (closing special quotation).
2. Current price (closing price).
3. Standard price, which is defined as follows:

The theoretical price of ex-rights, a special quotation from the previous day or the closing price from the previous day, in this order of priority.

(2) Adjustment of divisors

When components change or when they are affected by changes outside of the market, the divisor is adjusted to keep the index level consistent.

1) In the case of ex-rights

New Divisor = Old Divisor X(sum of stock prices cum rights - sum of rights prices)

sum of stock prices cum rights
Rights prices = last cum stock price - theoretical value of ex-rights


Theoretical value of ex-rights = last cum stock price+paid-in amount X paid-in allotment ratio

paid-in allotment ratio + split allotment ratio

When there is no split or a reverse split, the split-allotment ratio shall be one.

2) In case of capital decrease

Theoretical value of ex-rights = last cum stock price

1-ratio of capital decrease

3) In the case of replacement of components in the average

Rights price = price of replaced components - price of added components

4) In the case of stock buyback by issuer

Divisor not adjusted

(3) Magnifications

Adjusted magnification = 225

divisor

Adjusted magnification = Adjusted average = sum of stock prices / sum of stock prices = 225




mathematical average divisor 225 divisor

4. Nikkei Indices Chronology

September 7, 1950: Tokyo Stock Exchange starts calculating a stock price average by the ex-right adjustment method based on the Dow Jones model. The index is calculated retroactive to May 16, 1949.

November 12, 1968: TSE Chairman Morinaga announces the discontinuation of the TSE Adjusted Stock Price Average and the introduction of a new stock market index.

July 1, 1969: TSE starts announcing the market value-weighted Tokyo Stock Index. TSE continues to calculate and announce the Adjusted Stock Price Average for just one year thereafter, limiting it to only daily closing prices.

July 1, 1970: Upon discontinuation of TSE Adjusted Stock Price, Nikkei Inc., commissions calculations for a stock index.

July 1, 1971: A Nikkei subsidiary, Nihon Short-wave Broadcasting Co., Ltd., starts calculating and announcing the Adjusted Stock Price as NSB 225 Adjusted Average.

May 1, 1975: U.S.-based Dow Jones & Co. grants Nikkei exclusive rights to use of the name and the Dow calculation method for the Nikkei Dow-Jones Stock Price Average.

January 4, 1982: Nikkei starts calculating and announcing the Nikkei Dow-Jones 500 Stock Average, which covers an adjusted average for the selected stocks as of January 4, 1972.

April 1, 1985: Nikkei starts calculating and announcing the Nikkei Over-the-Counter Stock Average.

May 1, 1985: In a name change agreed to by Nikkei and Dow Jones, the Nikkei Dow-Jones Stock Price Average becomes the Nikkei Stock Average. At the same time, the Nikkei Dow-Jones 500 Stock Average becomes the Nikkei 500 Stock Average.

September 3, 1986: Singapore International Monetary Exchange (SIMEX) starts Nikkei Stock Average Futures trading.

September 3, 1988: Osaka Securities Exchange starts Nikkei Stock Average Futures trading.

June 12, 1989: Osaka Securities Exchange starts Nikkei Stock Average options trading.

September 25, 1990: Chicago Mercantile Exchange (CME) starts Nikkei Stock Average Futures and Futures options trading.

December 14, 1990: Nikkei announces new Deletion/Addition Standard, effective

October 1, 1991, for component stocks of the Nikkei Stock Average.

September 1, 1991: Nikkei starts calculating and announcing the market value-weighted Nikkei All Stock Index for all stocks listed on Japan's eight stock exchanges. It is calculated retroactive to January 4, 1980, and a value of 100 is assigned to the index for that date.

October 1, 1991: First changes are made in Nikkei Stock Average under new Deletion/Addition Standard.

October 8, 1993: Nikkei starts calculating and announcing the market value-weighted Nikkei Stock Average 300 for 300 stocks selected from the TSE first section. The average is calculated retroactive to October 1, 1982, and a value of 100 is assigned to the index for that date.

February 14, 1994: Osaka Securities Exchange starts Nikkei 300 Futures and options trading.

July 29, 1994: Chicago Board Options Exchange (CBOE) starts Nikkei 300 Options trading.

February 3, 1995: SIMEX starts Nikkei 300 Futures and Future options trading.