TSE’s market reform insufficient to invigorate corporate growth

The Tokyo Stock Exchange’s reforms are insufficient to attract funds from overseas investors and invigorate the market. Stricter listing criteria will be necessary in order for the TSE to be a market that can drive corporate growth.

The TSE has announced the selection of the new market segments for its 3,777 listed companies that will come about when restructuring occurs in April.

The First Section, Second Section, Jasdaq and Mothers are being restructured into three new segments.

Prime, the new top tier, will consist of 1,841 companies, or over 80% of the 2,185 companies currently listed on the First Section. Standard, intended for midsize enterprises, will have 1,477 companies, while 459 firms will be listed on Growth, a segment for start-ups.

The restructuring was initially aimed at creating an attractive market mainly for overseas institutional investors by listing Japan’s prestigious companies on Prime.

In the end, the reform is in name only as most of the First Section companies, including those that do not meet certain criteria, are simply sliding into Prime.

Among the criteria for a company to be listed on Prime is to maintain a tradable share ratio of at least 35% and a tradable share market capitalization of ¥10 billion or more, excluding cross-holdings by companies.

However, a transitional measure will be in place for First Section-listed companies that fail to meet the criteria. By submitting an improvement plan, they can be tentatively listed on Prime. As a result, about 300 firms, about half of the companies that do not meet the criteria, are scheduled to be listed on Prime.

It is also problematic that the TSE has not clearly set an improvement deadline for the measure. Twenty companies said their improvement plans would take five years or longer, while some others set a 10-year period for improvement. This highlights an apparent lack of urgency. The TSE should promptly set a deadline and make it as short as possible.

The total market capitalization of companies listed on the TSE is not only far lower than that of the world’s largest bourse, the New York Stock Exchange, but also outpaced by the Shanghai Stock Exchange. Should the reform end up being implemented in this half-hearted way, it could cause a further decline in the TSE’s prestige.

Some observers have pointed out that becoming listed on the First Section of the nation’s largest exchange has been the ultimate goal for companies in Japan, after which they have no incentive to further raise their corporate value.

In Europe, the London Stock Exchange limits the number of companies listed on its top market to about 450, while Germany’s main exchange narrows the number down to about 300.

To select stocks for listing, the TSE should also consider raising the market capitalization criteria for Prime. Regulations for delisting when companies fail to meet the criteria should be strictly implemented so that companies will feel a sense of urgency in their operations.

Of course, to make Prime an attractive market, it is essential for listed companies to carry out their reforms and achieve growth through active investment.

— The original Japanese article appeared in The Yomiuri Shimbun on Jan. 13, 2022.