Prime Time: Tokyo Stock Exchange’s New Look Goes Into Effect

(Bloomberg) -- The Tokyo Stock Exchange implemented its biggest revamp in over 60 years on Monday, with a long-awaited but largely symbolic restructuring of its market segments.

Earlier hailed as a once-in-a-generation shift, the introduction of the three new sections -- Prime, Standard and Growth -- was intended to boost Japanese stocks' appeal and understandability to foreign investors. But the restructuring has been met with a mixed reception and disappointed investors who wanted more sweeping reforms.

The Prime segment, which replaced the bloated First Section of companies that had formed the benchmark Topix, still has some 1,839 constituents -- around 80% of the original grouping.

“I don't think there's necessarily going to be a huge impact,” said Shogo Maekawa, a strategist at JPMorgan Asset Management.

Investor enthusiasm was lacking Monday amid thin volumes regionally, with markets closed for holidays in China and Taiwan. Japanese stocks fluctuated before rising in afternoon trading, with the Topix closing 0.5% higher. Total trading value on the Tokyo exchange was about 2.7 trillion yen ($22.2 billion), the lowest daily level so far this year.

‘Hodgepodge'

The Tokyo Stock Exchange previously had five sections, many of which overlapped largely as a result of the merger between the Tokyo and Osaka stock exchanges that created Japan Exchange Group Inc. The segment reform aims to consolidate the sections into distinct, easy-to-understand categories. 

Until now, the market segments were a “hodgepodge,” said Daiji Ozawa, the chief investment officer of Inveso Asset Management in Tokyo. “It's good that they're cleaning up the showcase,” he added. 

Source: Japan Exchange Inc. 

One of the biggest sticking points among investors is what the TSE refers to as a “transitional” measure that lets companies list on Prime even without meeting listing standards, by pledging to meet the criteria at some point in the future. Japan Exchange Group is reported to decide on how to handle these stocks within the year. 

Hiromi Yamaji, the president of the exchange, has said that the reforms starting Monday are just a first step, and urged investors to be patient and focus on the potential for lifting standards in the future. 

Free Float

Something investors will be watching for is a change to the calculation methodology of the free-float weight for the Topix, set to be announced later this week. The Topix index itself remains, but will see its components adjusted in stages over several years.

As part of this overhaul, the TSE will tweak its methodology for calculating free float, the shares that are considered available to be traded, in order to “better reflect actual liquidity,” it said. 

“The markets could be in for a surprise,” said Hayato Nagayoshi, chief quantitative analyst at Mizuho Securities Co. “There are still some elements in a ‘black box'.” The new methodology will be announced Thursday.

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