Japan is changing its stock exchange structure to improve
corporate governance. IFLR’s latest primer looks
at how the changes will impact asset managers and whether the
changes go far enough to address corporate governance
What are changes to the JPX about?
Financial services operator, the Japan Exchange Group (JPX) is
planning to restructure the Tokyo Stock Exchange (TSE) from
April 1 2022. Under the proposed changes the five existing
market segments: first section, second section, Mothers and
JASDAQ (standard & growth) will be reorganised into new
market segments: prime, standard and growth.
The prime segment will include companies with large market
capitalisation, excellent corporate governance, and high
liquidity. This segment requires that the tradable market
capitalisation of companies be at least JPY10 billion ($92.7
million). Companies under the standard segment will have basic
corporate governance standards and a standard level of market
liquidity. The growth segment will include companies with
relatively high risks that need to disclose progress at set
For asset managers, the question is which companies will
make the cut to be included in the prime section. This will
determine what companies will fall under the Topix index, which
tracks companies in the first section of the JPX.
PRIMER: Japan’s new foreign investment
Why is the JPX changing its structure?
The focus on corporate governance reform in Japan started
about 10 years ago when the Japanese government and the TSE
started discussions on encouraging the appointment of outside
and independent directors at Japanese listed companies.
"Since then, a number of reforms, including the
establishment of the corporate governance code and the
stewardship code have been implemented," said Masakazu Kumagai,
partner at Mori Hamada & Matsumoto. "Investor scrutiny on
Japanese corporate governance is getting stricter and
The TSE has indicated that it will review the corporate
governance code and apply higher standards to those companies
listed on the prime market. This would contribute to the trend
of heightened corporate governance in Japan.
Yusuke Motoyanagi, partner at Nishimura & Asahi, said:
"Higher market capitalisation requirements are required because
of the increase in passive investment. This and other high
thresholds will give Japanese companies an incentive to improve
What are the concerns of the reform?
Sources suggest that a main concern of the reform is that it
does not go far enough to reduce the number of companies in the
prime segment. The existing first section of the TSE has more
than 2000 companies.
"We welcome the intention to simplify the market structure
and clarify the role of each section, given that there are
ambiguities about the distinction between the current lower
sections," said Sachi Suzuki, associate director of engagement
at Federated Hermes. "However, it appears that a vast majority
of the more than 2000 companies currently on the first tier of
the exchange will likely stay in the new prime section after
Suzuki is concerned that the restructuring may fail to
address concerns that the top tier is overpopulated, from large
global companies to very small ones. "This is one of the
factors making the Japanese market less attractive to global
investors," she said.
"Investors typically investing in index funds would be
investing in companies across the board on Topix," said Chie
Mitsui, senior researcher at Nomura Research Institute. "The
problem is that there is no competition for companies to be
better, even with the corporate governance code in place."
She continued: "It’s easy for companies to stay
the same when passive funds are investing into them but there
are too many companies on the Topix."
"If the list of 2000 companies were to go down to 150, for
instance, it would be much easier to engage with companies on
corporate governance issues."
How are asset managers preparing for the changes?
Since all companies currently listed in the first section of
the stock exchange are included in the Topix, investors who use
the index as a benchmark will need to prepare for the change to
the composition of the index related to the reform of the stock
According to Kumagai, the TSE intends to review the
selection rule of the Topix constituent companies so that
liquidity will be more heavily weighted. It is expected that
the new rule will be determined and announced by March 2022.
The TSE has indicated that it will seek opinions from Topix
users in the course of its review.
"For asset managers, the question will be which companies
will be included in the premium segment of the Topix as they
will need to sell companies that are not included," said
Mitsui. "They will be tied down by investment policies and the
shift will take time because contracts between asset managers
and clients will need to be changed. The challenge is that all
of these existing contracts need to be changed."
Mitsui added that there will be a lot of uncertainty as to
whether companies on the borderline will be able to meet the
minimum market capitalisation threshold.
What areas lack clarity?
Suzuki said that it is also encouraging that the JPX is
planning to apply more stringent governance requirements to
companies listed in the prime section, although it is unclear
what new criteria will be introduced at the next revision of
the corporate governance code.
"While it may be reasonable to make compliance a criterion
for listing in the prime section with the enhanced criteria of
corporate governance code, it is important for the stock
exchange to ensure the compliance is not superficial but also
has substance," she said.
Kumagai said that attention should be paid to the definition
of tradable market capitalisation. In particular, TSE indicated
that it will review the definition of a tradable share and
shares held as cross-shareholdings could be considered
non-tradable. "While cross-shareholdings are still prevalent in
the Japanese market, investor pressure on listed companies to
unwind such relationships is getting stronger and stronger," he
said. "There might be certain companies which could be affected
by how tradable market capitalisation will be defined."
Suzuki said that plans to revise the definition of tradable
shares, the amount of which will be used as an additional
criterion for the each section of the market, and in
particular, to exclude shares held as cross-shareholdings from
the definition, are welcomed. She hopes that this will not only
help select companies with sufficiently liquid shares, but may
also help unwind cross-shareholdings, which are associated with
a number of other
issues, such as ignoring shareholders’
Japan: disclosure of corporate