Following market reclassifications on the Tokyo Stock Exchange (TSE) beginning April 2022, the Tokyo Stock Price Index (TOPIX) will undergo its own period of revision. What impact will the TOPIX revision have on Japanese stocks? Atsushi Kamio, Senior Researcher at Daiwa Institute of Research Ltd. explains.
This article has been partially extracted and translated from an article originally published in a supplemental addition of AL-IN vol. 62, December 2021.


Why are the TSE and TOPIX being revised?


In 2013, the TSE merged with the Osaka Securities Exchange resulting in the four current market divisions of First Section, Second Section, JASDAQ, and Mothers.  Five years later, the TSE began a reconsideration of its market classifications.  On April 4, 2022, TSE will restructure into three new market segments: Prime, Standard, and Growth. (See

One reason for the restructure is concerns about how accurately TOPIX -- a capitalization-weighted index that lists all firms in the First Section of the TSE -- reflects the market and how well it functions as an investable index.  With passive investment currently holding sway, as seen in the growth of ETFs, there is a distortion in the pricing of illiquid stocks.


Asset owners are concerned about the upcoming revision of TOPIX, one of Japan's leading indexes.  Could you tell us how the revision will unfold?


TOPIX will be revised in conjunction with TSE market segments to reduce the huge differences in market capitalization, float ratio, liquidity, etc., that currently exist among stocks in the First Section of TSE.  Today one finds in the First Section everything from Toyota Motor Corporation, with a market capitalization of about 30 trillion yen, to companies with a market capitalization of about 2 to 3 billion yen.  After the revision, companies with tradable share market capitalization of less than JPY 10 billion will be phased out of the TOPIX.  

There are currently 2,184 stocks in the First Section of TSE (as of the end of November 2021).  All stocks of companies listed on the TOPIX as of April 1, 2022 will be transferred to the new TOPIX index beginning April 4, regardless which market segment a company has chosen.  Transition to the new TOPIX will continue until the end of January 2025.  If the market capitalization of a company's shares in circulation is less than JPY 10 billion, the company's weight on the index will be reduced in stages until it is ultimately removed from TOPIX at the end of the transition.  The number of TOPIX constituents will be reduced.  Once the transition is complete, stocks may be periodically replaced.  A separate consultation will determine the method of periodic replacement.  It will be interesting to see what policy emerges.

With regard to new listings, only issues newly listed on the Prime Market will become components of TOPIX during the transition period.  After the transition is complete, even issues on the Standard and Growth Markets may be included in TOPIX upon listing.


The current "TSE’s First Section = TOPIX" definition will not be drastically changed, and it seems that major confusion in the market will likely be avoided.  On the other hand, it may not be enough to satisfy investors looking for speedy reform.  What should investors look out for in the transition between now and 2025?


From a passive management point of view, fund performance may be affected because of the trading execution costs associated with the replacement of stocks.  Asset managers will be required to devise ways to reduce the impact.

For active management, whether a stock is included in TOPIX will have a very large impact on performance, because if it leaves TOPIX, money from passive funds may automatically flow out.  On the other hand, for active management strategies for small and mid-cap stocks, it could be seen as an opportunity, because when the system changes, it creates distortions in the market and opens arbitrage opportunities.

Furthermore, this could be an opportunity for active managers not only in terms of short-term arbitrage opportunities, but also in terms of medium- to long-term engagement with small- and mid-cap companies trying to survive in the Prime Market and TOPIX.


What should asset owners keep in mind when managing Japanese stocks in the future?


With this revision the float ratio in TOPIX has been revised.  Many other changes are expected before the transition period ends at the end of January 2025, such as the possibility that the weighting of companies with large cross-shareholdings may be relatively reduced.  Changes could be even more drastic in the new phase after 2025.

When meeting with active managers, you should confirm how they are dealing with these changes, which will help you understand their thinking.  I believe this series of reviews will also create opportunities to deepen communication between asset managers and asset owners.

About Daiwa Institute of Research:

Atsushi Kamio

Senior Researcher / Director
Policy Research Department
Daiwa Institute of Research Ltd.

After joining Daiwa Institute of Research in 2006, Mr. Kamio led research on hedge funds, the Japanese economy, and Asian financial and capital markets.  From 2010, he was assigned to the Ministry of Finance for two years, where he was engaged in the Asian Bond Markets Initiative and economic surveys of major ASEAN countries.  Currently, he specializes in economic/social structure analysis and financial/capital market analysis of Japan and Asia.