It’s all change at the Tokyo Stock Exchange, or at least it will be on April 4. But opinion is divided about whether the planned upheaval will do enough to inject new life into one of the duller corners of the world’s equity markets. Japan Exchange Group, which was formed in 2013 through the merger of Tokyo Stock Exchange and Osaka Securities Exchange, is to simplify the TSE, cutting the five market sectors to three. The current First, Second, and Mothers sections, and the two sub-sections of Jasdaq will be split into Prime, Standard and Growth. As part of the transition, JPX has tightened its listing requirements, established minimum levels of capitalisation, increased the number of tradeable shares, addressed cross-shareholding issues, tidied up the composition of the indices and enhanced the quality of corporate governance. Although the move has been almost universally welcomed, opinion is divided as to whether the changes go far enough to fundamentally change international investor perception of corporate Japan. Some think JPX has missed an opportunity to make a real difference, while others are more sanguine about the pace of change. “It's quite subjective. Some think it's not going to change anything, but I think it should be seen as another incremental step towards a better standard of corporate governance in Japan,” said Alex Lee, a global equities portfolio manager at Columbia Threadneedle Investments. What is widely accepted is that the structure of Japan’s cash equity market is ambiguous and needed rationalising. “As with anything in Japan, things tend to be quite slow in terms of reorganisation,” said Michael Wu, a senior equity analyst at Morningstar. “It has been a long wait for the boards to be restructured, something that should have happened a while ago. It will, at least, bring some clarity for companies and for investors.” Legacy boards The ambiguity stems from the merger of the two exchanges when TSE became the venue for cash equities and OSE the place for derivatives trading. “At the time of the merger, the respective stock exchange classifications were kept unchanged under the cash equity TSE umbrella, so that investors and listed companies would not be confused as to where they belonged,” said Ayla Wagatsuma, manager of the TSE. But the resulting five segments “became too much for investors as there was little difference between Jasdaq Growth and Mothers,” she said. There were also concerns that the market concept of the Second section, Mothers, and Jasdaq overlapped. It was important for JPX to clarify the areas of confusion not just for the sake of investors and companies, but also for the long-term revenue generation prospects of the exchange itself. “The primary objective of an exchange is to provide liquidity,” said Koichi Niwa, an analyst at Citigroup. “For that, it needs to attract enterprising, growing companies and it needs to provide a good trading platform. Liquidity is key to TSE as over 60% of its revenue comes from trading commissions and clearing fees.” Hold me back A review of the market’s classifications started in 2018 with a public consultation to discover concerns from investors and companies. The review determined there were insufficient incentives for listed companies to increase corporate value, and that Topix was not functioning as an efficient investment tool – the benchmark referenced all the companies listed on the First section, which at more than 2,000 was too many for effective engagement. A lack of liquidity in the underlying shares was also an obstacle to its value as a benchmark. “The implications of the review were so huge that the venue of discussion passed up to the Japan’s Financial Service Agency,” said Wagatsuma. “It came up with a final report in December 2019. And once we had the proposal, we started building the rules.” A
