Japan Takes Step Forward in Massive Overhaul of Its Stock Markets

(Bloomberg) --

The biggest overhaul of Japan’s equity market in decades took a step forward after months of discussions between exchange officials and regulators resulted in a target date and listing criteria.

The number of Tokyo Stock Exchange sections will be reduced to three from five as of April 1, 2022, Japan Exchange Group Inc. said in a statement Friday, confirming media reports earlier this week. Companies listed on the equivalent of the exchange’s current first section will be limited to those with a minimum tradable market capitalization of 10 billion yen ($89 million).

“We would like companies to actively choose the section they would like to list in by the end of next year,” Japan Exchange Chief Executive Officer Akira Kiyota told reporters. The exchange also will set up an advisory panel to review the Topix index, he said.

In a bid to smooth the transition process, the bourse introduced rules that will allow companies to stay on the main market -- to be called Prime -- even if they fail to meet the new listing requirements by submitting plans to do so.

“While this was put in place to not cause disruption in the market, there’s a fear that the actual reform won’t progress for some time because companies will be able to use the grandfathering period,” said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui DS Asset Management.

The official announcement from the exchange operator follows years of discussions on how the complex network of Japan’s $6 trillion equity market could be reorganized. The Tokyo Stock Exchange currently has a total of 3,702 listed stocks, after having swelled by over 1,000 names following its 2013 merger with the Osaka Securities Exchange.

While the bourse’s statement confirmed guidelines of the reform proposed by the Financial Services Agency in December, there are still some key details yet to be determined, including what the benchmark index will look like after the reform. The 2,155-member Topix currently comprises most of the stocks listed on the first section of the exchange.

“It sounds like it will be difficult to push out existing members if Prime is also going to grandfather companies in,” said Travis Lundy, a special-situations analyst who publishes on Smartkarma. “It is not clear how Topix will define itself.”

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