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.