Devise Effective Measures to Realize Goals of Market Reorganization

The Tokyo Stock Exchange reorganized its markets to attract funds from investors, but this has not produced sufficiently tangible results. It is hoped that the bourse will strengthen its efforts to urge listed companies to increase their corporate value.

In April last year, the TSE restructured its four markets, including the former First and Second sections, into three new market segments: “Prime” for large companies, “Standard” for midsize firms and “Growth” for emerging enterprises.

The aim was to concentrate attractive companies in the top-ranking Prime market and increase investment, mainly from overseas.

However, a transitional measure was implemented to allow companies that did not meet the listing criteria to move automatically from the former First Section to the Prime market, and initially, no deadline was set for the exemption period.

In January, the TSE finally announced a proposal to set a three-year deadline for the transitional measure. Although the belated proposal gives the impression that the bourse lacks a sense of urgency, it is important to make the proposal the first step toward enhancing the attractiveness of the Prime market.

According to the TSE’s proposal, the deadline would be March 2025 for companies whose settlement period ends in March. If companies are not able to meet the criteria after an extra one-year “improvement period,” they will eventually be delisted.

The Prime’s listing criteria require companies to have a float worth at least ¥10 billion, with shares freely traded on the market by individuals and others, among other requirements. As of the end of last year, about 270 of the around 1,840 Prime-listed companies had not met the criteria.

It is hoped that those companies will expedite efforts to meet the criteria and not wait for the deadline before they act.

Even after the market reorganization, the total market capitalization of TSE markets remained flat at about ¥740 trillion. Not only is the figure far behind the New York Stock Exchange, which has a market capitalization of around ¥3,000 trillion, but it has also fallen behind the Shanghai Stock Exchange.

It is necessary to increase the growth potential of listed companies to expand market capitalization and compete with overseas markets. The TSE said it will focus on the price-book value ratio (PBR), which indicates whether a stock price is undervalued or overvalued, and will require companies to formulate improvement plans.

PBR is the ratio of the market capitalization to the value of net assets that would remain if the company was dissolved. If it falls below 1, the dissolution of the company would theoretically result in more money for investors.

According to the TSE, half of the companies in the Prime market have PBR ratios below 1, and the number of such companies is significantly higher compared to listed firms in the United States and Europe.

Companies including U.S. tech giants and electric automobile manufacturer Tesla Inc. saw their stock prices rise due to their growth prospects. Low PBR ratios symbolize the low growth expectations of Japanese companies.

It is essential for every company to boldly review their low-profit businesses and make aggressive investments in new growth areas such as digitization and decarbonization.

(From The Yomiuri Shimbun, March 10, 2023)