Why and how to invest in the Japanese stock market

Published June 19, 2022


In this article, we will see what the Japanese stock market is and why it is worth investing in the economy of this country.

What is the Japan Stock Exchange?

The Japan Stock Exchange is a financial market where investors can buy and sell shares. 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 Japan Stock Exchange is operated by the Japan Exchange Group.

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

There are two very important stock indexes in the Japanese stock market: Nikkei 225 and Topix.

The Nikkei 225 is Japan’s oldest index and includes the 225 largest listed Japanese companies. While Topix brings together almost 1500 large Japanese companies.

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

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

In addition, the Japanese Stock Exchange is open from Monday to Friday. It is open from 9:00 to 11:00, then from 13:00 to 15:00 local time. Tokyo’s time zone is UTC+9.

In metropolitan France, we are in UTC+2. Therefore, if you place an order on the stock market from Paris, you will have to take into account the time difference of 7 hours in summer and 8 hours in winter.

Why invest in the Japanese stock market?

Over the past ten years, from 2011 to 2021, Japan’s Topix index has grown by about 13% per year. This crop is one of the highest in the world.

Once again, it is inferior to the US S&P500 index, which includes the 500 largest US companies.

Then you probably know this, but Japan has a reputation for being 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 US counterparts. Indeed, the price of a Japanese stock pays out about 16 times its future earnings compared to 21 times the global average.

In the stock market, this figure corresponds to Value for Money (PER). This indicator is easy to find on the Internet and is widely used by investors. Thus, the higher the PER of an action, the more expensive it is.

Finally, to support the country’s economy, the Japanese central bank (also called the Bank of Japan) has been buying up shares in large numbers since the 2020 health crisis. This is a direct consequence of the increase in the share price.

At the time of this writing, the Bank of Japan owns over 5% of all Japanese stocks.

How to invest in the Japanese stock market?

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

Then you can do what is called stock selectioni.e. pick your stocks one by one by investing in companies like Toyota, Sony or Nintendo, just to name a few. But this method of investing requires a lot of knowledge of the stock market and takes quite a lot of time.

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

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

For Japan, you can purchase ETFs through a regular securities account. However, be aware that there are also some ETFs that replicate Japanese indices and are eligible for Plan d’Epargne en Actions (PEA).