How to invest in the Nikkei 225 from Australia

• Find out what Japan’s Nikkei 225 is all about for investors.
• Easiest ways to invest in the Nikkei 225.
• Pros and cons of investing in the Nikkei 225.

The Tokyo Stock Exchange – Asia’s largest and the third largest in the world, measured by market capitalisation – has, like all other leading global exchanges, a series of market indices which act as barometers for the price movements on the exchange and as an indication of the state of the Japanese economy in general. One of the leading Japanese indices is the Nikkei 225.

Also known as the Nikkei Stock Average, or just the Nikkei, the index has been calculated every day since September 1950 by the Nihon Keizai Shimbun newspaper. Unlike the many capitalisation-weighted indices on other world stock exchanges, it is a price-weighted index (like the Dow Jones Industrial Average), arrived at by dividing the sum of the prices of each stock in the index by 225. The composition of the index – Japan’s top 225 blue chip stocks – is reviewed every September.

This guide has everything you need to know about investing in Nikkei 225 shares, ETFs, and index trackers from Australia.

You can’t invest directly in the Nikkei 225 by buying a share of it. Instead, you can invest in exchange traded funds (ETFs) or index funds which track the Nikkei, or buy shares of individual companies which form the index.

Exchange traded funds

ETFs are investments that pool cash created by selling units in the fund, and investing the cash in a basket of securities – such as shares, fixed interest bonds and commodities. Each ETF aims to track a particular market index, industry, commodity or investment strategy.

ETF units can be bought and sold on the stock market in the same way as company shares. The unit prices constantly change during the trading day, but generally show less fluctuation than individual company share prices because they are not dependent on the performance of a single company. This makes them a way of spreading risk. Because they are less risky than individual shares, an investment in ETFs is less likely to record significant losses or gains in the short term. Investing in ETFs is a strategy for long-term investors.

Although there are some actively-managed ETFs whose investment components are selected by a team of financial experts, most Japanese ETFs will follow an index such as the Nikkei 225 or the Tokyo Stock Price Index (TOPIX).

Index funds

An index fund is a type of ETF which aims to exactly mirror the performance of a market index by investing in all the shares in the index, in the same proportion as the index.

Because they automatically track an index, index fund ETFs are passive funds, unlike actively managed ETFs, which may not follow any index exactly. Passive funds will usually have lower management fees than actively managed ETFs.

Australian investors can choose to invest in Nikkei 225 index funds listed on either the Tokyo Stock Exchange (TSE) or the ASX. Investing directly in TSE-listed ETFs will be more complicated because you will need to use an online broker offering access to the Japanese market, keep a trading account in Japanese yen, and be prepared to accept currency fluctuation risk as well as pay currency conversion fees. But if you want to go down this route there are plenty of TSE Nikkei index funds to choose from, such as:

• iShares Nikkei 225 UCITS ETF (TSE: 1329)
• Daiwa ETF – Nikkei 225 (TSE: 1320)
• Nomura NEXT FUNDS Nikkei 225 ETF (TSE: 1321)

Another option would be to invest in a Nikkei 225 index fund listed on the New York Stock Exchange, London Stock Exchange, or the Euronext, but once again this is more complicated because you would be trading in a foreign currency.

Individual company shares

Another way to invest in the Nikkei 225 is to select several of the companies listed on the exchange and invest in them directly.

It would be too time-consuming and expensive to attempt to invest in all of them, but the list includes many blue chip companies well known in Australia, including Toyota (TSE: 7203), Sony (TSE: 6758), Canon (TSE: 7751), Nintendo (TSE: 7974), Hitachi (TSE: 6501), Nissan (TSE: 7201), and Honda (TSE: 7267).

You can invest in all of these companies via the Tokyo Stock Exchange using a Japanese yen trading account with an online broker. Some of them are also listed on the LSE and NYSE, but they trade in yen or USD rather than in AUD.

The fact that Nikkei 225 companies are large and well-known does not protect you from the increased risk of investing in individual shares because the success of your investments depends on the fortunes of just a few companies rather than a diversified fund.

Step 1: Choose a broker

There are hundreds of online share trading platforms to choose from. When comparing options, check their brokerage, cash withdrawal, and activity fee amounts. Available tradable securities offered should include ETFs and shares.

If you wish to invest in shares and ETFs via the Tokyo Stock Exchange, whichever broker you choose must have access to that exchange. For the sake of having all your investment activity in one place, you may also want access to US and European share markets from the same broker.

Some brokers offer commission-free trades on ETFs. If you’ve decided to invest in shares, look for a broker offering fractional shares, since many Nikkei 225 companies have high prices for a single share.

Step 2: Decide how much to invest

Only ever invest what you can afford to lose because share markets are volatile.

If you can’t withstand losses in the short term, it’s best to wait until you can or plan to invest for the long term only. Losses are always a possibility, and your capital will be at risk.

Step 3: Transfer funds to your account

Add funds to your trading account with a bank transfer, the most commonly accepted method.

It may take some time for funds to clear before you can start trading, and if you are trading in yen or USD but have transferred AUD, your cash will have to be converted into the required currency first. Note that your broker may require a minimum deposit amount.

Step 4: Choose between shares, ETFs and index funds (or a combination of them)

ETFs and index funds are diversified across a range of companies, so they typically experience lower price volatility than individual company shares and can be better for long-term investment.

• Short-term investors hoping for quick capital gains (but also prepared for losses) may prefer to buy shares.
• ETFs can often be traded commission-free.
• Index funds mirror the market, so their value rises and falls in line with the broader market.

Step 5: Configure your order

Depending on the broker you use, you can choose from many different kinds of order.

A market price order is the most straightforward, requiring virtually no setup. Once executed, you’ll get shares at the next available market price for the share or fund unit.

If you have a specific strategy, you’ll need more options in terms of order configuration. Some brokers have highly customisable orders that can be triggered by events, meaning you can buy or sell when your chosen share or fund hits a price target.

Step 6: Place your order

When you’re happy with all of your decisions, submit your order to be executed.

Step 7: Monitor your investment

Share investment should not be a set-and-forget activity. Even if you intend to invest for the long term, you need to keep an eye on the company or fund's performance and price movements.