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JAPAN UPDATE
ANCA VASILOV | HEAD OF EQUITIES EMEA ASSET MANAGEMENT ONE INTERNATIONAL LTD.
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THE UPCOMING SHARE MARKET REORGANISATION From April 2022, Japan’s share market is undergoing a once-in-a-generation reorganisation. The new structure saw the introduction of a simpler, three-segment market structure. Requirements to join the top echelons of the listed share market tightened. The overarching aim of the changes, according to the Japan Exchange Group (JPX), is to “boost listed companies’ sustainable growth and mid-to long-term corporate value creation.” In this article, we review the details announced to date.
WHAT IS CHANGING? Two major changes are being set in motion, starting in April 2022. First, the current market segments of the Japanese cash equity market were reorganised as of 4th April 2022. Second, the representative TOPIX index will undergo gradual changes over a longer period, due to complete by the end of January 2025. We recap below the main upcoming changes.
PRIME, STANDARD AND GROWTH MARKETS Currently, Japan’s equity market has four listing segments – TSE 1st Section, TSE 2nd Section, JASDAQ (Standard and Growth) and TSE Mothers. On 4th April 2022, the market began being reorganised into three listing segments: Prime, Standard and Growth - each with their own listing criteria. The Prime Market will set higher listing standards than the current TSE 1st Section, including adherence to the highest levels of corporate governance as stipulated by the latest revisions to Japan’s Corporate Governance Code. The Standard Market will include companies with sufficient
liquidity and governance levels to be represented in the public markets, while the Growth Market will include companies with high future growth potential.
Within the key listing requirements for each new market segment, of particular focus over the past six months have been the greater requirements set for a Prime Market listing. These include the need for a company’s tradable shares to represent at least 35% of overall share capital, and for the tradable market cap to exceed JPY 10bn. With shares held by domestic banks, insurance companies, or business corporations excluded from tradable shares, this requirement has already started to act as a spur to further corporate reorganisations in Japan.
The result of new segment selections was published by the Japan Exchange Group in early January 2022. A total of 1,841 companies will be admitted to Prime. This represents a decrease from the near 2,200 current constituents of the TSE 1st Section. Over 600 of the TSE 1st Section companies did not meet the listing criteria for the Prime Market as of 30th June 2021 (the base date for the transition). Of these, 296 companies submitted plans to the exchange in order to meet the criteria in the future. This group of companies has secured Prime listing. 1,477 companies are due to join the Standard Market, comprising of current 2nd Section and JASDAQ Standard constituents, as well as a number of companies currently listed on the 1st Section. 459 companies will list on the Growth segment.
CORPORATE GOVERNANCE CODE REVISION The Corporate Governance Code, implemented in 2015 and first revised in 2018, has already brought about substantial change across corporate Japan. Further revisions to the Code were unveiled in June 2021.
For companies listed on the Prime Market, the revision sets higher requirements. Amongst the newly covered or further revised areas are the exercise of shareholder rights at General Shareholder Meetings, sustainability initiatives, diversity, English language disclosures, Treating Customers Fairly disclosures, the effective use of independent directors, preconditions for Board effectiveness, and policies for constructive dialogue with shareholders. All 83 Principles of Corporate Governance (excluding Principles for Prime listed companies) will also apply to companies listed on the Standard Market. This represents a significant increase for the over 600 companies previously listed on JASDAQ Standard, which previously had only applied to five General Principles of Corporate Governance.
PROPOSED CHANGES TO THE TOPIX INDEX In conjunction with the listing segment changes, the TOPIX index will also change. Currently, the TOPIX index includes all stocks listed on the TSE 1st Section (in excess of 2,100 companies). As outlined above, the Prime Market segment will not include all current constituents of the TOPIX index. However, there was no immediate change to the TOPIX index in April 2022. Companies currently included in the index are able to retain their position for the time being. Thus, as of April 2022, the link that currently exists between the listing section and index inclusion was broken. For a period of time, the TOPIX index is expected to include companies listed on both the Prime and Standard Markets. However, companies whose tradable market share are below the JPY 10bn threshold at two predetermined points will see their index weight gradually reduced to zero by January 2025 (“phased weighting reduction constituents”). It is notable that all crossshareholdings other than those classified as “pure investment purpose” will be excluded from the free float definition.
The reorganisation is best understood in the context of the multiple changes to Japan’s corporate landscape implemented in the past seven years, and its aim is to further improve the investment attractiveness of Japanese stocks for both domestic and foreign investors.
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