Japan’s key stock indexes, the Nikkei and Topix, have hit record highs. The Nikkei 225 is a price-weighted index of 225 leading blue-chip companies in Japan. The Topix, or Tokyo Price Index, represents all domestic companies on the First Section of the Tokyo Stock Exchange. It is adjusted for free-float and is market capitalization-weighted, including over 2,000 companies.

Tracking the Market

The Topix aims to reflect the overall trend of Japan’s stock market. Unlike the Nikkei 225, it provides a wider market view by focusing only on shares available for trading. Now that both the Nikkei and Topix are at all-time highs, we see implied volatility rising. The Nikkei Volatility Index has increased to 22, indicating trader caution and driving up option premiums compared to earlier this year. This environment suggests that simply buying calls is becoming more expensive, which calls for more complex strategies. The market rally is driven by a weak yen, currently around 162 to the US dollar, enhancing profits for exporters. Foreign investment in Japanese stocks has reached over ¥7 trillion in 2025, echoing the 2013 Abenomics bull run. It may be wise to consider long positions on major exporter-focused ETFs, potentially using bull call spreads to manage rising option costs. Yet, we must pay attention to the Bank of Japan. Recent minutes from their meetings indicate a growing interest in another interest rate hike to address inflation. A surprise move could quickly strengthen the yen, causing a sharp market pullback. Buying put options on the Topix or Nikkei might provide valuable protection against this risk in the coming weeks.

Valuation Insights

Despite the record highs, valuations don’t seem overly stretched based on fundamentals. The Topix’s forward price-to-earnings ratio is at 16.5, which is appealing compared to the S&P 500’s average of over 21. This suggests the rally could continue, but shifting investments from exporters to financials, which would benefit from rising rates, might be a smart strategy. It’s important to remember that the last record high for the Nikkei was in late 1989, which was followed by a long decline. While current corporate governance reforms and foreign investment set the situation apart, this history is a reminder. Therefore, strategies like collars, which involve buying a protective put and selling a covered call, could be a wise way to safeguard gains while still allowing for potential increases. Create your live VT Markets account and start trading now.

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