Japan's headline index, the world's other price-weighted major — and the benchmark whose thirty-four-year round trip is the most instructive chart in equity investing.
The Nikkei 225 was launched in 1950 by the Tokyo Stock Exchange and later taken over by the newspaper Nihon Keizai Shimbun, from which it takes its name. It was modeled on the Dow, and it inherited the Dow's price-weighted methodology along with the Dow's problems.
It is the number quoted for Japanese equities worldwide, despite the existence of TOPIX — a broader, cap-weighted index that institutions generally prefer for exactly the reasons professionals prefer the S&P 500 to the Dow.
The 1980s Japanese asset bubble produced valuations that are hard to convey now. Equities and urban land alike traded at multiples that assumed permanent extraordinary growth, and the anecdotes from the period — several of which circulate in versions too neat to verify — understate rather than overstate how far prices had detached from earnings.
What followed was not a crash so much as a very long deflation. The index fell for over a decade, spent two more decades going sideways through banking crises and demographic decline, and only regained its 1989 level in early 2024.
This is the empirical answer to the claim that equities always recover if you wait. They frequently do. But the world's second-largest economy at the time produced a benchmark that took a working lifetime to return an investor's nominal capital — a possibility any long-horizon plan should at least acknowledge.
Like the Dow, constituents are weighted by share price rather than market value, with a divisor adjusted for splits and substitutions. In yen terms, the price gaps between Japanese constituents can be extreme, so a small number of very high-priced shares carry disproportionate influence over the whole index.
This produces the same structural oddity as the Dow: a company can be enormously valuable and barely register, while a mid-sized company with a high nominal share price moves the headline number substantially. It is the reason TOPIX, which is capitalization weighted and covers a far broader set of Tokyo-listed companies, is the benchmark institutional Japanese portfolios are actually measured against.
Constituents are selected by committee with attention to sector balance and liquidity, and reviewed annually.
An extraordinary starting valuation, followed by a banking crisis, prolonged deflation, and demographic decline. The bubble's size meant the starting point was the problem as much as anything that came afterwards.
For understanding the Japanese market, TOPIX — it is broader and its weighting reflects company size. The Nikkei is what gets quoted.
Structurally yes: both are price weighted, committee selected, and older than the methodologies that superseded them. The Nikkei has 225 constituents against the Dow's 30.