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Japan is not always in the spotlight when talking about global investing. Most foreign investors are satisfied with the United States, perhaps adding a little European exposure, and then that’s it.
However, the Japanese stock market is among the most significant and established in the world. And for investors seriously considering global diversification, learning how to invest in the Japanese stock market will take them a long way.
The Tokyo Stock Exchange has consistently ranked among the top exchanges in the world by market capitalization, alongside those of the US and China, making Japan a cornerstone of global equity markets, according to the World Federation of Exchanges.
Quick Answer
- The Japan Exchange Group operates the Tokyo Stock Exchange, which is the country’s main stock exchange.
- There are two main indices to gauge Japanese market performance: the Nikkei 225 and TOPIX.
- International investors can access Japanese stocks through brokers with TSE access, Japan-focused ETFs, or ADRs for major firms.
- All Japanese stocks are quoted in Japanese yen; therefore, you have to consider currency risk.
- Understanding how Japan’s trading works, including board lot sizes and market segments, is important for making sound investment selections in Japanese markets.
- Currency, demographic, and geopolitical threats (Asia Pacific) are the biggest risks.
What Is the Japanese Stock Market?
The Japanese stock market is one of the world’s largest equity markets, supported by the Tokyo Stock Exchange (TSE) and two main market indices: the Nikkei 225 and the TOPIX.
The market has thousands of enterprises across a broad spectrum of sectors, including technology, financial services, automobiles, and electronics. It is large and deep enough to be a meaningful addition to a well-diversified global investment portfolio.
The Nikkei 225 is a price-weighted index comprising 225 actively traded large-cap businesses on the Tokyo Stock Exchange, where higher-priced stocks have greater weight in the index regardless of market capitalization.
The TOPIX is an index of all domestic common stocks listed on the Prime market of the Tokyo Stock Exchange, weighted by market capitalization. As a whole, TOPIX can be seen as a more comprehensive indicator of the Japanese market than the Nikkei 225. So, knowing the difference between the two will help you understand how the different investment products relate to the market.
What Are the Main Japanese Stock Exchanges?
Japan’s main exchange is the Tokyo Stock Exchange, operated by the Japan Exchange Group and comprising three market segments.
Japan Exchange Group (JPX) oversees the overall structure of Japan’s equity markets. The TSE’s three segments represent varying sizes and listing requirements of the companies:
The Prime Market is the top level, where companies are large, have high market capitalization, high liquidity, and high governance. You’ll find the most famous list of Japanese companies here, and most products related to investing in Japan are based on this list.
The Standard Market comprises mid-sized companies with solid listing requirements but not yet eligible for listing in the Prime Market.
The Growth Market is designed for earlier-stage companies with high growth prospects and has listing requirements and a risk profile akin to growth-based smaller-cap markets elsewhere in the world.
The Prime Market is the focus for most international investors, not only for its liquidity but also because most ETFs focused on Japan are based on its constituents.
How Can Foreign Investors Buy Japanese Stocks?
There are three main ways for international investors to gain market access to Japanese equities: direct market access via a broker, equity-focused ETFs, and ADRs for major Japanese companies.
The first thing international investors need to understand when learning to trade on the Japanese stock exchange is that Japanese stocks are traded in Japanese yen during Japanese market hours, which presents two main issues for international investors that domestic investors don’t face: currency and time zone.
- Route one – Direct broker access: Some internationally licensed brokers offer access to the Tokyo Stock Exchange and other major markets worldwide. You can purchase Japanese equities directly, submitting orders during TSE trading hours and settling in Japanese yen. The position will be funded in a foreign currency, and the proceeds will be converted back on the sale.
- Route two – Japan-focused ETFs: ETFs tracking Japanese benchmarks such as the Nikkei 225 or TOPIX give you diversified exposure at the click of a button on your local exchange, in your local currency during local market hours. The trade-off is that you get broad market exposure rather than picking individual companies.
- Route three – American Depositary Receipts: Some of Japan’s largest firms have ADRs traded on US markets, so investors in the US can gain exposure to Japanese companies in US dollars without going directly through the TSE. ADRs are available on a company-by-company basis and do not provide exposure to all of Japan.
Real-world example: A European investor seeks exposure to Japanese equities, but their broker does not offer direct access to the TSE. Instead of moving brokers, they invest through a TOPIX-tracking ETF traded on a European platform. The ETF offers broad exposure to the Japanese market during European trading hours, and currency hedging options are available depending on the selected fund structure.
Platforms like STARTRADER provide a variety of foreign securities to investors of all experience levels seeking to enter global stock markets, including Asian markets, within a structured framework.
What Should You Know About Investing in Japan?
Certain structural aspects of Japanese equity markets differ from those of Western markets; knowledge of these before investing can help prevent surprises.
Trading time in Japan is based on Japan Standard Time, which places the market significantly ahead of European and American time zones. The TSE has 2 trading sessions, followed by a midday break, except for some trading that starts while other markets are still closed.
Board Lot Sizes are unique to Japan. Many Japanese stocks trade in minimum increments of 100 shares (or more), which can make investing much more capital-intensive than trading a single share on a US exchange.
Corporate governance in Japan has been thoroughly reformed, with regulators encouraging listed companies to increase shareholder returns, board independence, and capital efficiency. Traditionally, Japanese firms paid lower dividends and had cross-shareholding arrangements. That landscape has been changing, but at different rates in different companies and industries.
What Are the Risks of Investing in the Japanese Stock Market?
Japanese equity investing carries certain risks, some shared with international investing and others unique to Japan, given its economic and demographic environment.
The first one is currency risk. Yen movements against your home currency will not directly affect your returns, aside from movements in Japanese stocks. International investors can benefit from a strong yen when they repatriate, but can lose from a weak yen even if their stocks have risen in the local currency.
Demographic and economic obstacles are systemic. Japan is one of the world’s oldest countries and has faced deflationary pressures for decades, affecting domestic consumption and business revenue growth differently than in younger, higher-growth nations.
The geopolitical exposure is pertinent, as Japan is in the Asia-Pacific region. The risk posed by major neighboring economies can affect Japan’s securities markets differently from those in Europe or North America.
As the Japanese market is highly concentrated in automotive, electronics, and financial services, exposure to the broader Japanese market is also heavily weighted towards industries that are more sensitive to global trade and technological change.
The IMF report said Japan was on a different track from most other developed economies in its economic recovery and inflation dynamics, affecting the behavior of the yen and the context for corporate earnings growth.
Frequently Asked Questions
It’s the main stock exchange in Japan. It is one of the largest exchanges in the world by market cap and has three segments: Prime, Standard, and Growth.
Japan’s most widely followed stock market index tracks 225 major, actively traded companies listed on the Tokyo Stock Exchange.
This will vary from broker to broker. Not every account will allow direct access to TSE. ETFs that focus on Japan are more likely to be available on your home exchange.
Through brokers that provide access to international markets, Japan-focused ETFs on US exchanges, or ADRs for select major Japanese companies.
Yes. ETFs tracking the Nikkei 225 and TOPIX are traded on several exchanges worldwide and offer diversified exposure to Japanese stocks without having to go directly to the TSE.
All Tokyo Stock Exchange-listed stocks trade in Japanese yen. Currency fluctuations will affect total returns for international investors independently of stock price performance.
The Nikkei 225 is a price-weighted index of 225 large companies. The more comprehensive and representative indicator is TOPIX, which is market-capitalization weighted and covers all domestic common stocks on the Prime Market.
Final Thoughts
Japan’s equity market is a real diversification opportunity: a big, liquid, mature market with an economic structure and business organization distinct from that of the U.S. and Europe. This is what makes it appealing, and part of what needs preparation.
Once you understand the benchmark’s framework, how it’s exchanged, its currency exposure, and the various ways you can access it, a random interest becomes a practical choice. The market is open; be it via direct brokers, ETFs, or ADRs, but the key is that investors approach it with the same degree of specificity as they would any other international market.
Risk Disclaimer
This content is for educational purposes only and does not constitute investment advice. Investing in foreign stock markets involves risks, including currency risk, geopolitical risk, and differences in the regulatory environment. The value of investments can go up or down, and past performance is not indicative of future results. Please consider your personal financial situation and consult a qualified financial professional before making investment decisions. Not investment advice.
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