The Japanese stock market is one of the largest in the world, listing the stock for some of the world's most recognized brands, including Mazda, Nissan, Sony and Toshiba. The main stock exchange in Japan is the Tokyo Stock Exchange (TSE), and while a major global exchange there are several things to be aware of before diving as a foreign investor/trader. Traders should understand Japanese stock regulations, the size of the market, major indexes, liquidity, Japanese currency, as well as ways to domestically invest in Japan.
Japan Stock Market: Size and Indexes
According to the World Federation of Exchanges, as of January 2014 the Tokyo Stock Exchange (TSE) had a market capitalization of $4.421 trillion, making it the third largest stock exchange in the world after the NASDAQ and NYSE. The NASDAQ has a market capitalization of $5.998 trillion and the NYSE $17 trillion.
While there are a number Japanese stock indexes, there are two main indexes, as well as another which isn’t linked to the TSE.
- TOPIX tracks the market value of domestic common stocks listed as TSE First Section, which are the largest stocks on the exchange. There are several other TOPIX indexes, including the TOPIX 30, 100 and 500 which track the largest 30, 100 and 500 stocks on the TSE.
- The JPX-Nikkei Index was introduced in 2014, and includes 400 stocks which are screened for a number of different factors, including debt, deficits, liquidity and return on equity. While the index showcases how strong companies are doing, which meet the eligibility criteria, it may not reflect the Japanese stock market as a whole.
- The Nikkei 225 is the most popular Japanese stock market index but was not developed by the TSE. This index tracks the 225 companies listed on the TSE First Section.
Current index prices and updates are available on the TSE website at Stock Price Index – Real-Time.
Japan Stock Market: Prominent Stocks and Liquidity
Stock prices on the Tokyo Stock Exchange are in Japanese Yen (JPY), a heavily traded global currency. The price of Japanese Yen can vary drastically with other currencies over time. As of May 21, 2014 the USD/JPY exchange rate is hovering around 100 (100 Yen for every $1); for a current exchange rate information see XE.com: USD to JPY.
As one of the world’s largest exchanges, the Tokyo Stock Exchange offers a wide of array of highly liquid stocks, rivaling the Nasdaq. Many stocks, especially those which are part of the major indexes are analyzed and tracked by major financial websites and financial news channels around the world. Major global brands are listed on the TSE, including Mitsubishi, Toshiba, Mazda, Hitachi, Sony and Nissan.
Stock on the TSE go by a “code,” which is similar to “symbols” in U.S. markets.
The stocks listed in figure 1 are also some of the largest capitalization stocks listed on the TSE, as they are part of the Nikkei 225 which tracks only First Section stocks— the largest on the exchange.
Japan Stock Market: Operations and Risks
The trading day is split into a two sessions, a morning session from 9:00 AM to 11:30 AM, and an afternoon session from 12:30 to 3:00 PM, Japan Standard Time.
Primary order types are limit and market orders.
For TOPIX 100 stocks priced under 10,000 Yen the tick size, or minimum incremental movement, is 1 Yen. This is roughly $0.01 U.S (subject to exchange rate). For other stocks, not in the TOPIX 100, the tick size will vary based on price, as shown in figure 2.
Source: Tokyo Stock Exchange
Daily Price Limits prevent a stock price from swinging beyond certain levels. These levels are based on the prior day’s closing price. Figure 3 shows these levels for stocks priced under 5,000 Yen. For a full list see the TSE Trading Rules.
Source: Tokyo Stock Exchange
The risks associated with Japanese stocks are those associated with any stock. Japan is a robust global economy and market leader in technology development, offering stocks with great potential, but losses can always occur with trading. Trading stocks with high volume and large market capitalization provide some stability, although won’t guarantee profitable trades.
Japanese stocks are priced in Japanese Yen, so not only do investors need to concern themselves with the direction of the stock, but also the currency. A decline in the Yen will have a dampening effect on returns once the stock is sold and the Yen converted back to the U.S. dollars. An increasing Yen has a positive effect on returns.
Before investing or trading in a foreign market it is important to understand how that market operates. Make small trades at first, until comfortable with the process and regulations. Once experienced, then move on to trading your typical position size.
Domestic Ways to Invest
If you’re not quite ready to have your money half-way around the world, there are a number of ways to gain exposure to the Japanese market and Japanese stocks domestically, using U.S. markets and U.S. dollars.
One way to do it is through ETFs. ETFs provide traders with exposure to a basket of Japanese stocks, traded on U.S. exchanges and are priced in U.S. dollars
Another way to invest directly in Japanese companies is through American Depositary Receipts (ADRs). These are foreign companies listed on U.S. exchanges, so they are accessible to investors and priced in U.S. dollars. Currently there are 17 ADRs listed on the NYSE or Nasdaq. There are 269 ADRs listed on the over-the-counter (OTC) market, which is less regulated than the major exchanges.
Sponsored ADRs are issued in participation with the foreign underlying company, where as unsponsored ADRs are not. The ADRs listed on the OTC market are mostly unsponsored.
The Bottom Line
The Tokyo Stock Exchange is a robust global exchange, rivaling the NASDAQ in size. There are a multitude of stocks offering significant volume and large market capitalization to warrant foreign investment. Stocks are priced in Japanese Yen, and the exchange rate fluctuates which could result in improved or reduced performance. Instead of investing in stocks directly on the Tokyo exchange, ETFs and ADRs provide a way for investors to participate in the Japanese market using U.S. exchanges and U.S. dollars.