Japan Markets ViewIs Corporate Action to Strengthen for 2nd Stage of TOPIX Revisions?

 

[Keiichi Nakayama, QUICK Market Eyes] The first-stage revisions of the Tokyo Stock Price Index (TOPIX), one of Japan’s leading stock price indices, is set to be completed in January 2025. Following this, the second stage of revisions will commence in October 2026 to further enhance TOPIX‘s functionality as an index. Small and medium-sized companies with slightly lower market capitalization are expected to increase their offering from January to March in order to increase the number of free-float shares circulating in the market and remain as a TOPIX constituent. From a long-term perspective, attention is also focused on the possibility that measures to increase market capitalization will be strengthened.

 

<Development and Upcoming Schedule of TOPIX Revisions>

● First Stage
Apr 2021	Publication of proposed rules for TOPIX revisions
Apr – Jun 2022	Abolition of link to market segments
	Exclusion of cross-held stocks from free-float shares
Oct 2022 – Jan 2025	Publication of phased weighting reduction constituents based on tradable share market capitalization
	Implementation of phased weight reductions for target stocks

● Second Stage
Jun 2024	Publication of proposed rules for TOPIX revisions
	Index Consultation
Sep 2024	Decision and publication of rules for TOPIX revisions
Mar 2025	Deadline for change in the number of free-float shares for companies with a fiscal year ending in March in connection with the first periodic replacement
End of Aug 2026	Base date for the first periodic replacement
Oct 2026	Publication of stocks subject to the first periodic replacement and implementation of the replacement
Oct 2026 –	Phased transition to the Next-Generation TOPIX and start of phased weighting reductions
Oct 2027	Re-evaluation of phased weighting reductions
Jul 2028	Phased transition to the Next-Generation TOPIX and end of phased weighting reductions
Aug 2028	Base date for the second periodic replacement
Oct 2028	Publication of stocks subject to the second periodic replacement and implementation of the replacement

* Compiled based on JPXI’s publicly available data and various interviews.

 

Before the market restructuring, TOPIX was an index for stocks in the First Section of the Tokyo Stock Exchange (TSE). Following the TSE’s market restructuring, the first stage of revisions was carried out with the aim of improving the functionality as an index. Phased weighting reductions of stocks with a tradable share market capitalization of less than JPY10 bn have been progressing, and the total number of constituents will decrease to around 1,700. In the second stage of revisions, all TSE markets will be eligible for inclusion. While some stocks will be newly included in the index, the selection criteria will be based on liquidity. According to estimates by JPX Market Innovation & Research (JPXI) as of July 2024, the number of constituents will further decrease to approximately 1,200.

 

* Source: JPXI, Overview of Revisions of TOPIX and Other Indices

 

The first replacement of constituents in the second stage of revisions is still some time away, in October 2026. However, considering the rules and mechanisms of the TOPIX, companies on the borderline of the new criteria need to take immediate action in order to meet the criteria for selecting existing constituents. One of the selection criteria is “tradable share market capitalization,” the market value of shares circulating in the market, rather than market capitalization in general. This criteria requires companies to increase free-float shares by reducing “listed shares excluding non-free-float shares” such as those held by major shareholders and treasury shares. Deadlines for the initial selection are fast approaching for many companies.

The calculation of free-float shares is based on a company’s annual securities report at the end of the fiscal year. If the fiscal year ends between January and March, the calculation is conducted at the end of October of that year based on the annual securities report at the end of the fiscal year. The base date for the first selection of TOPIX constituents in the second stage is August 2026. Therefore, free-float shares as of the end of March 2026 will be reflected after the first selection.

Atsushi Kamio, senior researcher at Daiwa Institute of Research (DIR), expects that “companies on the borderline of the Next-Generation TOPIX (to be launched soon) will beef up efforts to increase the number of free-float shares, including selling shares by major shareholders and reductions in the number of cross-sharing shares held by other companies.” Meanwhile, the initial selection in August 2026 will be based on the “market capitalization” of free-float shares. Thus, Mr. Kamio considers that “an increase in the number of free-float shares may trigger a stock supply-demand imbalance, but after that, there may be moves to boost stock prices by strengthening shareholder returns and other means.”

The Next-Generation TOPIX is designed to encourage competition among companies. Concerning the initiatives of the Japan Exchange Group (JPX), such as the Next-Generation TOPIX and the TSE’s request for “Management Conscious of Cost of Capital and Stock Price,” Nozomi Moriya, strategist at UBS Securities, noted, “The JPX’s initiatives will help enhance corporate value and overall market attractiveness, providing an opportunity for companies to review the significance and meaning of listing on the market.”

Ms. Moriya attended a conference in Shanghai, China, from January 13 and met with investors. She felt that interest in Japanese equities has recovered somewhat compared to the past. According to Ms. Moriya, investors showed interest in the efforts of the JPX, including the TSE. She stated, “The ability to manage and transform companies from a bottom-up perspective will be demanded.” In the midst of changes in the TOPIX as an index, corporate responsiveness is also likely to be tested.
(Reported on January 22)

 

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[Vol. 1] Calculation Rules for Next-Generation TOPIX and Forecast for Constituent
[Vol. 2] Calculation Rules for Next-Generation TOPIX and Forecast for Constituent

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