Nintendo, Keyence, Murata to Join Nikkei 225 in Major Change

(Bloomberg) — Nintendo Co., Keyence Corp. and Murata Manufacturing Co. will join Japan’s Nikkei 225 Stock Average in a major shake up to the makeup of the blue-chip gauge.

The three companies’ stocks will be added on October 1, Nikkei Inc. said in a statement. The long-awaited inclusion of Nintendo comes after Nikkei implemented changes to the way the measure is calculated, allowing for the adjustment of high-priced stocks. 

Nisshinbo Holdings Inc., Toyo Seikan Group Holdings and Sky Perfect JSAT Holdings Inc. will be removed. 

Earlier this year, Nikkei announced the changes to its methodology, a move seen to be aimed at modernizing the gauge and allowing companies such as Nintendo to join. The steps include a provision that caps a new stock’s weight at the time of addition so that it won’t account for more than 1%. 

“Finally we have stocks representative of Japan included in the Nikkei 225,” said Tomoichiro Kubota, a senior market analyst at Matsui Securities in Tokyo. “These are stocks that are huge in terms of market cap, and with their inclusion, the Nikkei 225 should be able to better represent the Japanese economy.”

The three firms have a combined market value of around $280 billion. 

Read more: Nikkei 225 Tweak Could Open the Door for Nintendo or Keyence

While the changes don’t come as a major surprise, they hit after the best two-day performance for the index since January. The news that Japan will have a new prime minister, with unpopular Yoshihide Suga stepping down, has coincided with a reduction in coronavirus cases. On Monday, Tokyo recorded fewer than 1,000 cases, the first time since mid-July. 

Nikkei 225 futures traded in the night session in Osaka rose above 30,000 yen. The cash market’s highest close this year was 30,467.75 in February. 

Notable Exclusion

As some of the country’s largest firms, the exclusion of the three from the index had long stood out. Keyence, a maker of industrial automation systems, is the second-biggest firm in the country by market value, while Nintendo is among the most well-known brands. Murata is a key supplier to the world’s smartphone makers, including Apple Inc. 

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Analysts have long speculated firms such as Nintendo and Keyence weren’t previously added due to concerns over the potential impact of their large share price. Nintendo currently trades at 55,140 yen ($501.77) a share, while Keyence closed trading Monday at 69,260 yen. 

Like the Dow Jones Industrial Average, the Nikkei 225’s methodology has been criticized because its price-weighted nature makes it more prone to wild swings in stocks with higher prices. 

That’s changed with Nikkei Inc.’s latest revisions. The changes capped the impact of firms with high share prices on the benchmark’s weighting upon their introduction.

As passive funds tracking the index need to buy and sell to reflect the changes, Nikkei 225 changes are reliable events for volatility. Shares frequently surge after addition to the gauge, with Nexon Co. rising 17% last October the day after upon its addition. 

“The impact on the deletions is a lot higher” than on the inclusions, said analyst Brian Freitas who publishes on Smartkarma. While Sky Perfect’s exclusion was expected, he sees the selling of Nisshinbo and Tokyo Seikan resulting in around 18% of the free float being sold. “The stocks could drop a lot before investors start to get involved,” he wrote. 

(Updates with futures in eighth paragraph, quote in last paragraph.)

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