Japan’s economy is home to some of the world’s most recognisable brands, from Toyota to Sony and SoftBank. For Australians looking to diversify their portfolios, investing in the Nikkei 225 index offers exposure to the country’s largest and most influential companies.
But how can you access this market from Australia? This guide breaks it down, covering what the index is, how it works, and the best ways to invest in it.
Understanding the Nikkei 225 index
The Nikkei 225 is Japan’s most widely followed stock market index. It tracks 225 blue-chip companies listed on the Tokyo Stock Exchange (TSE) and is a key barometer of the country’s economic performance.
Unlike other global indices that are weighted by market capitalisation , the Nikkei 225 is price-weighted. This means companies with higher share prices have a bigger influence on the index, regardless of their overall size. This setup makes it similar to the Dow Jones Industrial Average in the United States.
Some of the biggest names in the Nikkei 225 include Toyota, Sony, SoftBank, Fast Retailing (Uniqlo), and Nintendo – companies that have a global footprint beyond Japan’s borders.
The rise and evolution of the Nikkei 225
Launched in 1950, the Nikkei 225 has witnessed Japan’s post-war economic boom, the rise and fall of the asset bubble in the late 1980s, and its subsequent recovery. The index reached an all-time high of nearly 39,000 points in 1989 before the country’s financial bubble burst, leading to a prolonged period of stagnation.
The Japanese economy faced challenges for years, but in the past decade, there has been a renewed resurgence. Factors such as corporate governance reforms, rising exports, technological advancements, and government stimulus programs have helped restore investor confidence.
Today, the Nikkei 225 is viewed as a crucial benchmark for Japan’s equity market and a gateway for international investors seeking exposure to Asia’s second-largest economy.
How companies are selected for the Nikkei 225
The Nikkei 225 is reviewed annually, ensuring it continues to represent the shifting landscape of Japan’s economy. Unlike indices such as the S&P 500 , which use market capitalisation as a key factor, the Nikkei 225 uses different selection criteria:
- Share price impact – Companies with higher stock prices have more influence on the index.
- Industry diversity – The index aims to represent a broad range of sectors, from consumer goods to technology and finance.
- Liquidity – Stocks must be actively traded and maintain a strong market presence.
- Regular adjustments – Companies can be added or removed based on changing market conditions and economic trends.
Why the Nikkei 225 matters for investors
The Nikkei 225 is more than just a stock index – it’s a key indicator of Japan’s economic health. It influences global markets, provides insights into investor sentiment, and serves as a benchmark for Japanese equity investments.
Investing in this index allows you to access well-established global brands as well as innovative companies in robotics, automotive, and consumer technology.
How to invest in the Nikkei 225 from Australia
1. Investing through ETFs
Arguably the easiest way for Australians to invest in the Nikkei 225 is through exchange-traded funds (ETFs) . ETFs track the performance of the index and can be bought and sold on stock exchanges like regular shares. They offer diversification, low fees, and liquidity.
Some ETF options include:
- BetaShares Japan Currency Hedged ETF (ASX: HJPN) – While not an exact Nikkei 225 ETF, it offers access to large-cap Japanese stocks, including many in the index.
- iShares MSCI Japan ETF (ASX: IJP) – An ASX-listed ETF that provides exposure to a broad range of Japanese equities, including many Nikkei 225 components.
- WisdomTree Japan Hedged Equity ETF (NYSE: DXJ) – A US-listed ETF that tracks Japanese equities while hedging against currency fluctuations.
- iShares Nikkei 225 ETF (TSE: 1329) – A Tokyo-listed ETF providing full exposure to all 225 companies. Aussie investors can access this ETF via some international trading platforms.
- NEXT FUNDS Nikkei 225 Leveraged Index ETF (TSE: 1570) – Another Japan-based ETF that mirrors the index closely. To invest, you'd need a broker that offers access to the TSE.
2. Investing through managed funds
Managed funds offer another way to gain exposure to the Nikkei 225. Unlike ETFs, which passively track the index, managed funds are actively managed by professional investors who select stocks based on market trends, valuations, and growth potential.
Find out more about the differences between ETFs and managed funds, and how to invest in them .
Some popular managed funds include:
- Platinum Japan Fund – A well-known actively managed fund focusing on Japanese growth stocks.
- T. Rowe Price Japan Fund – Actively managed with a focus on long-term capital appreciation.
- Fidelity Asia Fund – While broader than just Japan, this fund includes significant investments in leading Japanese firms, providing indirect exposure to the Nikkei 225.
3. Investing directly in Japanese stocks
For those who prefer greater control over their investments, buying individual shares from the Nikkei 225 is an option. This method allows investors to pick specific companies they believe have strong growth potential.
Several online brokers provide access to the TSE, allowing Australians to purchase shares in Toyota, Sony, SoftBank, and other major corporations.
Challenges of accessing the Tokyo Stock Exchange
Investing directly in stocks listed on the TSE can be more complex for Australian investors compared to buying local or US-listed assets. Some key challenges include:
- Broker availability – As we hinted at earler, not all Australian brokers offer direct access to the TSE. This means investors may need to use international trading platforms.
- Foreign exchange requirements – Investments on the TSE require transactions in Japanese yen (JPY), which means investors must convert their funds and manage currency exchange fees.
- Time zone differences – The Japanese market operates during different hours from Australian trading times, which can affect the ability to monitor and trade actively.
- Regulatory and tax implications – Buying foreign shares may have different tax treatment, and investors should understand Japan’s withholding tax rules on dividends.
For those who prefer a simpler approach, ETFs and managed funds may offer easier ways to gain exposure to the Nikkei 225 without the challenges of trading directly on the TSE.
Important risks to consider when investing in the Nikkei 225
While investing in the Japanese stock market can be rewarding, there are other risks you should consider before diving in:
- Market volatility: Like all stock indices, the Nikkei 225 can be affected by economic downturns , corporate scandals, and external shocks.
- Currency risk: Since the index is priced in Japanese yen (JPY), fluctuations in the AUD/JPY exchange rate can impact returns.
- Sector concentration: The Nikkei 225 has a strong focus on technology and consumer goods, which can lead to sector-specific downturns.
- Economic and political factors: Changes in Japan’s economic policies, trade relationships, or demographic trends can influence stock performance.
- Regulatory environment: Japan’s financial regulations may differ from Australia’s, impacting trading and taxation considerations.
Is investing in the Nikkei 225 right for you?
Investing in the Nikkei 225 provides Australians with access to Japan’s largest and most innovative companies. Whether you choose ETFs, managed funds, or direct share purchases, there are multiple ways to enter this market.
However, as with any international investment, it’s essential to understand the risks, research your options, and align your investments with your financial goals. The Nikkei 225 could be a solid addition to a diversified portfolio, but it requires a long-term outlook and careful risk management.
If you’re unsure about your investment strategy, consulting a financial adviser can help tailor an approach that suits your financial objectives.
Happy investing!
