Why and how to invest in the Japanese stock market

Published June 19, 2022



HAS
+

In this article, we will look at what the Japanese stock market is and why it is worth investing in this country’s economy.

What is the Japanese Stock Exchange?

The Japanese Stock Exchange is a financial market where investors can buy and sell stocks. This stock exchange is the third largest in the world by market capitalization after the NYSE (New York Stock Exchange) and NASDAQ (another US stock exchange).

The Japanese Stock Exchange is managed by Japan Exchange Group.

To determine the company’s market capitalization, multiply the number of securities in circulation by the share price. For example, if a company issues 1,000 shares at a price of 50 euros, the capitalization will be 50,000 euros.

In the Japanese stock market, there are two very important stock market indices: Nikkei 225 and Topix.

The Nikkei 225 is Japan’s oldest index and includes the 225 largest Japanese companies listed on the stock exchange. While Topix unites almost 1,500 large Japanese companies.

Namely, for the Nikkei 225, like the Dow Jones, its weight is not proportional to the market capitalization of the companies that make it up. Its weight is calculated according to the share price.

On the other hand, for Topix, its weighting is well calculated in terms of market capitalization. This method of calculation is best suited to determine the real value of all companies in the index.

In addition, the Japanese stock exchange operates from Monday to Friday. Open from 9:00 to 11:00, then from 13:00 to 15:00 local time. All times are in Tokyo – UTC +9.

In the French capital, we are at UTC + 2. So, if you place an order on the stock market from Paris, you have to take into account the 7-hour time difference in summer and the 8-hour time difference in winter.

Why invest in the Japanese stock market?

For the past ten years, from 2011 to 2021, the Japanese Topix index operated at about 13% per year. This yield is one of the highest in the world.

Again, it lags behind the US S & P500 index, which includes the 500 largest US companies.

Then, you probably know it, but Japan is considered one of the most innovative countries in the world. Indeed, on the Asian continent, along with South Korea, these two countries invest the most in research and development.

Another reason is that Japanese stocks are quite undervalued compared to their European and American counterparts. Indeed, the price of a Japanese stock is paid about 16 times more than its future earnings, compared to 21 times the world average.

In the stock market, this figure is consistent Price and profit ratio (PER). This indicator is easy to find on the Internet and is widely used by investors. Thus, the higher the PER action, the more expensive it is.

Finally, to support the country’s economy, Japan’s central bank (also called BoJ) is buying up shares in large numbers after the 2020 health crisis. This has the direct effect of raising the share price.

At the time of writing, the Bank of Japan owns more than 5% of all Japanese stocks.

How to invest in the Japanese stock market?

To invest in the Japanese stock market, you will first need to open a regular securities account (CTO) with an online broker.

Then you can do what is called stockpiling, that is, choose your shares one by one, investing in companies such as Toyota, Sony or Nintendo, and this is only three. But this method of investing requires extensive knowledge of the stock market and is quite time consuming.

So, there is an easier alternative – to invest through exchange traded funds (ETFs). ETFS are baskets of stocks that copy the stock market index, such as the Nikkei 225 or Topix.

By investing in ETFs, you diversify your investments into hundreds or even thousands of companies and benefit from the growth of an entire geographic region.

As for Japan, you can buy an ETF through a regular securities account. However, keep in mind that there are also some ETFs that copy Japanese indices and meet the requirements of the Plan d’Epargne en Actions (PEA).