How to Invest in Japan Stocks | Everything You Need to Know (2024)

Japan's stock market provides traders and investors access to stable and well-established companies. Shares of some of the most well-known global brands are traded on the nation's equity markets, including Honda (HMC), Panasonic (6752) and consumer electronics giant Sony (6758).

While stocks in other developed nations have crumbled amid concerns about inflation and tightening monetary cycle in 2022, Japan stocks have managed to weather the storm. Here we take a look at how to invest in Japan stocks.

Japan stock market overview

Before looking at how to invest in Japan stock market, let’s dive into the basics. Japanese stocks are traded on the Tokyo Stock Exchange (TSE), the main Japan stock exchange and part of the Japan Exchange Group (JPX).

The JPX was founded as a merger between the Tokyo Stock Exchange Group and Osaka Securities Exchange on January 1 2013.

As of 11 November, JPX listed 3,844 companies, making it the world’s third largest securities exchange by market capitalisation after the New York Stock Exchange (NYSE) and Nasdaq.

Although the TSE was established in 1949, its history dates back to 1878, when it was launched as Tokyo Kabushiki Torihikijo.

While the TSE is the main exchange, the most popular Japanese stock index is the Nikkei 225 (Japan225), which tracks the performance of 225 large corporations from a broad range of industries. The index was established in May 1949 as the country's economy began to recover from World War II. The Nikkei is a price-weighted index, meaning it is an average of the share prices of all companies included.

As of 11 November, technology carried the biggest weight (49.22%) followed by consumer goods (23.25%) and materials (12.64%). Consumer electronics companies such as Sony and Panasonic, automaker Honda and the gaming firm Nintendo (7974) were among the constituents.

Nikkei 225 performance in 2022

Over 2022, the Nikkei 225 has been going through a volatile ride. However, it has generally outperformed its peers in local currency terms. The index opened 2022 at 29,301, but gradually fell, touching 16-month lows at 24,681 on 9 March. The index dropped, taking its cue from bearish Asian markets following Russia’s invasion of Ukraine and heightened inflation fears.

Concerns about recession in the US, Japan’s main trading partner, as the US Federal Reserve (Fed) began its tightening cycle, which pressured the index. However, the Nikkei 225 managed to rebound and recoup some of its losses for the rest of the year on weaker Japanese yen and stimulus package from the Japanese Government. Piero Cingari, Capital.com’s market specialist, commented:

“The Nikkei has so far outperformed other major stock market indices around the world, if we consider the local currency performance. Taking into account the falling value of the Japanese yen, however, the performance of the Japanese stock market expressed in dollars terms is actually very bad.”

How to invest in Japan stocks?

There are several options for those interested in gaining exposure to the Japan stock market. Investors can buy individual stocks directly via brokers, or choose exchange traded funds (ETF) and mutual funds that contain Japanese stocks.

Stocks

Both Japanese and foreign investors can buy stocks in Japanese companies via stock brokers or online trading platforms.

Foreign investors can buy Japanese stocks through international brokerages that offer Japanese equities. US investors can also buy Japanese stocks that are traded on US markets through American Depository Receipts (ADR), such as Nintendo, Panasonic and Sony.

ETF and mutual funds

Those who prefer passive investing can purchase exchange-traded funds (ETFs) or mutual funds that have exposure to Japanese companies. For example, those that track the Nikkei 225 Index.

ETFs trade on exchanges as regular stocks. Investors in them are entitled to receive dividends and capital gains corresponding to the number of shares in the fund that they own.

How to trade Japanese stocks with CFD?

Alternatively, traders may choose contracts for difference (CFDs) to get exposure to Japanese stocks and indices. A CFD is a derivative contract between a trader and a broker that aims to profit from the difference between the trade's opening and closing prices. CFDs allow traders to speculate on share price movements – both long and short – without owning the underlying stock. At Capital.com we offer CFDs for a range of Japanese companies, such as Honda, Panasonic, Nintendo and Sony.

Trade Sony (6758) CFDs

87.41% of retail CFD accounts lose money

CFDs use leverage, which means a trader can open a bigger position with less capital. Note however, that this can magnify both profits and losses, and may lead to a margin call if a share price moves against your trade. Due to the overnight fees, CFDs are typically used for short-term trading. Traders should take care to fully understand the risks of leverage trading before investing.

For example, at Capital.com we provide Nikkei 225 (Japan 225) CFDs with 5% margin, or 20:1 leverage. This means that a trade can open a position worth $1,000 with only $50 of funds.

Trade Japan 225 CFDs

87.41% of retail CFD accounts lose money

Traders who want to open a CFD position typically pay a margin deposit, which amounts to a portion of the total trade value. To keep a leveraged trade open, a trader must keep a minimum amount of money in their account, known as maintenance margin.

Risk associated with investing in Japan stocks

Investors should be aware of the risks associated with investing in Japanese companies, from macroeconomic climate, to currency risks.

Global recession and inflation risks

A global recession is likely to be the key risk to consider when investing in Japanese stocks. Global economic growth was expected to slow from 6% in 2021 to 3.2% in 2022 and 2.7% in 2023, according to data from the International Monetary Fund (IMF). With the exception of the Covid-19 pandemic and the global financial crisis in 2007–2008, it is the weakest growth since 2001. Capital.com’s Cingari noted:

“The profitability of Japanese equities would undoubtedly suffer in the event of a worldwide recession, which may potentially put downward pressure on the price of the Nikkei as well as the performance of the individual stocks in the market.”

Jefferies’ analysts led by global equity strategist Sean Darby said on 3 November that while Japan was expected to escape recession and maintain growth, the rising inflation rate, particularly from wage increases, remained a headwind for the country’s economy.

JPY devaluation

The US dollar to Japanese yen (USD/JPY) exchange rate crossed 150 level for the first time since 1990 in late October. The BoJ’s decision to stick to its ultra-low policy rate has partly caused the Japanese yen (JPY) to depreciate against the US dollar, reflecting a widening gap between Japanese interest rates and the US policy rate.

Cingari added:

“If the yen depreciates and the trade in Japanese stocks is closed because theinvestor wants to take profits or to cut losses, the performance of thattrade is impacted by the currency devaluation.”

On the other hand, Congari noted that Japanese export-dependent businesses like Sony could benefit from the yen's depreciation as they may experience increased demand from abroad.

Changes in ultra-low interest rate policy

The BoJ has kept its policy rate at the 2016 level of -0.1%, as of October, going against aggressive tightening cycles by other central banks.

While investors now enjoy the benefits of lowest interest rates in the world, Cingari said there is a risk the BoJ may change its policy. Analysts have expected that the BoJ was unlikely to alter its ultra-dovish monetary policy until BoJ Governor Haruhiko Kuroda retires in April 2023.

Final thoughts on investing in Japan stocks

We strongly encourage traders to conduct their own due diligence before buying or selling Japanese stocks, reviewing the latest news, a wide range of analyst commentary and fundamental analysis.

Traders should be aware of the risks associated with Japanese equities and the use of leveraged instruments such as CFDs. More importantly, it is critical to recognise the inherent volatility of the financial markets.

Keep in mind that past performance does not guarantee future results. And never trade money you can't afford to lose.

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