<Nikkei Index Consultation>
May 23, 2022
Nikkei Inc.
Index Consultation Regarding the Introduction of the “Weighting cap” on theconstituents of the Nikkei Stock Average, and others
Nikkei Inc. is considering amendments to the methodology of the Nikkei Stock Average(Nikkei 225). Nikkei is amending the methodology, two years in a row, to better serve
the users of the index either as a measure of the market or as an underlying for financialproducts.
Nikkei 225 is the best-known index of the Japanese equity market and widely used not
only for evaluation of the equity market but for various financial assets. Nikkei keeps
the basic features of the index unchanged, namely, its constituents selected from highly
liquid stocks with considerations to the industrial sector balance. It will continue to be
calculated as a price-weighted index and maintains continuity of the index with historyof more than 70 years.
Based on the above policy, Nikkei intends to amend the methodology in considerationof the impact it might have on the market where the size of the assets linked to the index
needs attention. Nikkei values the opinions received through this consultation and willcontinue to review the rules of the Nikkei 225 to reflect the changes in the market in thefuture.
Nikkei consults on the specific subjects listed below.

The changes will be implemented

from the periodic review in the year of 2022.
① Introduction of the weight cap to the constituents of the Nikkei 225
Considering the diversification of the constituents and maintenance/improvement of thequality of the Nikkei 225 as a yardstick of the market, Nikkei will introduce “cap” to theweight of constituents to keep the maximum weight under a certain level. In thecalculation of the index, “Capping Ratio”, will be applied to reduce the weight of aconstituent which is extremely high. The level of the weight to which the cap is applied1

(weight cap threshold) will be 12% at the time of introduction and will be reduced to 11%
and 10% at the periodic reviews in October 2023 and October 2024 respectively.
Currently, the Nikkei 225 is calculated as a sum of prices adjusted by the priceadjustment factor (PAF) divided by the divisor. Under the new rule, if a constituent
weight exceeds the weight cap threshold, a capping ratio will be considered in addition
to the PAF. After introducing the capping ratio, the Nikkei 225 will be calculated as asum of adjusted prices (by PAF or PAF + capping ratio) divided by the divisor. As such,the method of the index calculation is not affected.
[Example] When the price of a constituent is 90,000 yen and the PAF is 1, if the capping
ratio of 0.9 is applied, the adjusted price in the calculation will be 90,000 x 1x 0.9 =81,000
yen.
The capping ratio of 0.9 will be applied to a constituent whose weight exceeds the weightcap threshold. If some capping ratio was already applied to such a constituent, thecapping ratio will be decreased by 0.1.
Based on the increase of the frequency of the periodic review to twice a year as describedunder ② below, the weight cap threshold will be changed as follows.
Periodic review

Weight cap threshold

October 2022

12%

April 2023

12%

October 2023

11%

April 2024

11%

October 2024 and after10%

If the weight of a constituent to which capping ratio is applied becomes lower than 5%
due to decline in the share price etc. on the base date of a periodic review, its capping
ratio will be increased by 0.1. The capping ratio will be cancelled if the capping ratio
before the change is 0.9.
In principle, the capping ratio is applied, revised, or cancelled on the effective date of
the constituent change resulting from the periodic reviews. However, depending on theliquidity of the constituent, changes in the capping ratio may be implemented in two or2more steps.
[Index Guidebook] 3: Calculation method, Preamble
Current Rule

Proposed new rule

Adjusted stock price= stock price x price adjustment factor

Adjusted stock price= stock price x price adjustment factor (*)

Nikkei Stock Average = sum of Adjusted Nikkei Stock Average = sum of Adjusted
stock price / Divisor

stock price / Divisor(*) For a constituent to which a capping
ratio is applied, price adjustment factor
will be replaced by “capped priceadjustment factor” .

[Index Guidebook] 3: Calculation method, (3) Capping ratio (numbers to the items below
this new (3) will be increased by 1)
Current Rule

Proposed new rule(New)Capping ratio is a number which is used
to temporally decrease the weight of aconstituent when such weight exceeds acertainthreshold(“weightcapthreshold”).
The capping ratio isapplied, revised, or cancelled as stipulatedbelow.
Weight cap threshold is 12% upon
introduction at the periodic review ofOctober 2022. It will be reduced to 11%
and 10% respectively at the periodic
reviews in October 2023 and October
2024.
For a constituent to which a capping ratio
is applied, the price of such a constituent
is adjusted by “capped price adjustment
factor” as shown below.
3Capped price adjustment factor (CPAF)= Price Adjustment Factor x capping ratio
CPAF is rounded down to the nearest 0.1.
- If, on the base date of a periodic review,
the weight of a constituent to which any
capping ratio is not yet applied exceeds
the weight cap threshold, a capping ratioof 0.9 is applied on the effective date of
the constituent change resulting from theperiodic review. If a capping ratio wasalready applied to such a constituent,capping ratio will be decreased by 0.1.
However, if no change is observed in theCPAF after the application of the new
capping ratio, the capping ratio will bedecreased further until there is a change in
the CPAF.
- If, on the base date of a periodic change,
weight of a constituent to which a CPAF isapplied is below 5%, the capping ratio will
be increased by 0.1 on the effective date of
the constituent change resulting from theperiodic review. However, if no change
is observed in the CPAF after theapplication of the new capping ratio, thecapping ratio will be increased further
until there is a change in the CPAF. If thecurrent capping ratio is 0.9, capping ratio
will be cancelled.
- When a constituent to which CPAF isapplied goes for a large-scale stock split orreverse split and the PAF is adjusted by the4ratio of split or reverse split, the capping
ratio may be revised so that the new CPAF
does not change the weight of theconstituent. For such a constituent, thecapping ratio may have fractions after 0.1
and be increased/decreased by the number
other than 0.1 in the next revision of thecapping ratio.
- In principle, the capping ratio is applied,revised, or cancelled on the effective dateof the constituent change resulting fromthe periodic review.
However,depending on the liquidity of theconstituent, changes in the capping ratio
may be implemented in two or more steps.
② Increase of the frequency of the periodic reviews to twice a year
To maintain the quality of the index and to reflect changes in the industrial structure,
Nikkei has been reviewing and reshuffling the constituents of the Nikkei 225 once a year.
Nikkei introduced an upper limit of 3 constituents change at a periodic review to mitigate
the impact of the trading due to constituent reshuffle from the periodic review of 2021.
During the consultation regarding the upper limit rule, Nikkei received comments fromrespondents that such rule may impede timely transition of the constituents. Whilelimiting the impact on the market and accelerating the transition of the constituents,
Nikkei increases the frequency of the periodic review from once (in October) to twice (inApril and October) a year. Upper limit of 3 per a periodic review is retained.
[Constituent Selection Rules] 2: Rules of the Periodic Review, Preamble
Current Rule

Proposed new rule

Constituents are reviewed annually as Constituents are reviewed twice a year asevaluated at the end of July (base date) in evaluated at the end of January and Julyaccordance with following rules. (base dates) in accordance with following
Results of the review become effective on rules.

Results of the review become
5the first trading day of October. The effective on the first trading day of April
maximum number of the constituents and October. The maximum number ofreshuffled is 3.
the constituents reshuffled at a periodic
review is 3.
③ Change in a liquidity measure, from “magnitude of price fluctuation by(trading) volume” to “magnitude of price fluctuation by trading value”.
In the periodic review of the Nikkei 225, 450 stocks selected by liquidity constitute the“high liquidity group” and this group is the base for deletion and addition of theconstituents. Currently the liquidity of the stocks is assessed by two measures, “tradingvalue” and “magnitude of price fluctuation by volume” based on the past 5 years’ data.
Nikkei plans to replace the latter by the “magnitude of price fluctuation by trading value”.
The magnitude of price fluctuation by volume was introduced in the methodology
revision in April 2000. Since trading value is becoming common as a measure of theliquidity, Nikkei replaces trading volume by trading value.
[Constituent Selection Rules] 2: Rules of the Periodic Review, ① Assessment ofliquidity (“High Liquidity Group”)
Current Rule

Proposed new rule

Choose highly liquid stocks from theTokyo Stock Exchange Prime Marketand group them as the “High LiquidityGroup”. The measures to assess theliquidity are :Choose highly liquid stocks from theTokyo Stock Exchange Prime Marketand group them as the “High LiquidityGroup”. The measures to assess theliquidity are :① Trading value of the preceding 5 years ① Trading value of the preceding 5 years② Magnitude of price fluctuation by ② Magnitude of price fluctuation byvolume (defined as (high price/lowtrading value (defined as (highprice)/volume) in the preceding 5price/low price)/trading value) in theyears
preceding 5 years
Top 450 (double the constituent count for Top 450 (double the constituent count for
the index) most liquid stocks in terms of the index) most liquid stocks in terms oftwomeasuresconstitutethe“High twomeasuresconstitutethe“High6

Liquidity Group”.

Liquidity Group”.

[Question]
Do you agree to the following proposed amendments?
1. Introduction of the weight cap to the constituents
2. Setting weight cap threshold initially to 12% and decreasing it down to 10% in steps.
3. Increasing (or cancelling) the capping ratio for constituents whose weight become
lower than 5%
4. Increasing the frequency of the periodic review from once (October) to twice (Apriland October) a year.
5. Changing a liquidity measure from “magnitude of price fluctuation by (trading)volume” to “magnitude of price fluctuation by trading value”.
6. If you have opinions or ideas to further improve the Nikkei 225, please provide.
Please submit your opinion from the consultation section on the following URL.
https://indexes.nikkei.co.jp/en/nkave/governanceConsultation closing date:June 27, 2022 (JST)

Although your contribution to this consultation is respected, Nikkei makes a decision atits own discretion. The result of the consultation will be informed as a formal
announcement of the new methodologies. Your contribution will not be publishedalthough a summary without identity may be used in our documents.
Contact: https://www1.entryform.jp/nikkei_indexes_contact_en/7