TOPIX, also known as the Tokyo Stock Price Index, is a capitalization-weighted index of all the companies listed on the First Section of the Tokyo Stock Exchange. The First Section contains the larger companies in the index, while the Second Section is comprised of smaller companies. TOPIX, because of its nearly 2000 constituents, is widely regarded as a broad benchmark for Japanese stock prices.
Moreover, TOPIX is a free float capitalization index. That is, the constituents are weighted, not only according to shares outstanding, but by only those freely available for trading. Many Japanese firms have cross holding with their strategic partners, hold stock in these partners and rarely, if ever, trade it. Hence, those shares are out of circulation and not available for trading. Only the free float shares, or investable shares, are used to calculate the capitalization of TOPIX’s member constituents. The total market capitalization of all TOPIX constituents is about ¥417 trillion (3.69 trillion in USD).
As is the case with capitalization-weighted indexes, the top constituents hold greater weightings. The top 20 stocks in TOPIX are approximately 25% of the total weighting, and the top 70 stocks make up half the market cap of TOPIX.
Figure 1 illustrates the top members by capitalization—and many are household names in the corporate space.
|Member||Weighting in Index (%)|
|1) Toyota Motor Company||3.36|
|3) Softbank Group||1.69|
|4) Nippon Telephone and Telegraph||1.57|
|5) Sony Corporation||1.37|
As a result of a fiscal policy, encouraging lower rates and monetary expansion (quantitative easing), the TOPIX has performed well in recent years. After nearly 25 years of declining markets in Japan, stock prices have been on a positive trend over the last few years, particularly 2017, as the Japanese government tries to stimulate their economy. Despite the rally in Japanese share prices, the TOPIX must advance much further to eclipse its 1989 highs.
Five-year annualized: 20.11%
Twp-year annualized: 14.85%
YTD return: 20.32%
While the TOPIX is a key cap weighted broad-based benchmark of Japanese stock prices, financial markets also focus on the Nikkei 225 Stock Average. The Nikkei 225 is a price-weighted average of the 225 top-rated Japanese companies listed in the First Section of the Tokyo Stock Exchange (it excludes REITs, preferred stocks and ETFs). As such, higher-priced stocks have a greater weighting in the index while the TOPIX is influenced by high-capitalization companies. The Nikkei 225 is also used around the globe as the premier index of Japanese stocks. Both the Nikkei 225 and the TOPIX are key benchmarks of Japanese equity prices despite their differences in methodology.
Because of the prominent nature of the indices, many financial products linked to both the TOPIX and the Nikkei 225 have been created and are traded worldwide. These products include futures and options on various global derivatives exchanges, including CME Group.
|TOPIX||Nikkei 225 stock price average|
|Capitalization/price wtd.||Cap weighted||Price Weighted|
|Number of stocks||>2000||225|
|Total market cap||3.6 trillion USD||3.53 trillion USD|
|CME Group Derivative products||Launch Feb 5, 2018||Options: yes Futures: yes|
|Top five constituents||Toyota Motor (3.36%)
Mitsubishi UFJ (2.04%)
Nippon Telephone & Telegraph (1.57%)
|Fast Retailing (6.53%)
FANUC Corp (4.54%)
Tokyo Electron (3.69%)
The construction of the two indexes (one being price-weighted and the other cap-weighted) does cause some divergences. For example, Toyota Motor, the largest weighting in the TOPIX is about 3.4% of the index while it is only 1.2% of the Nikkei 225. Fast Retailing is the largest component of the Nikkei at 6.5% weighting yet is less than .4% of the TOPIX and not even among the top 100 members. Its influence in the Nikkei 225 is thus much greater than TOPIX.