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EDITORIAL | What Good is Tokyo Stock Exchange Reform Without a Transition Deadline?

There’s a failure, for example, to sufficiently narrow down companies that qualify for the new Prime section. Investors need clarity.



Trading in the new market with its three sections started on April 4, 2022, Tokyo Stock Exchange in Nihonbashi Kabutocho, Tokyo (Photo by Shunsuke Sakamaki, Sankei.)

The Tokyo Stock Exchange (TSE) underwent market restructuring and opened on April 4 with three new market segments.

The restructuring aims to attract domestic and foreign investment by making the market segments easier for investors to understand, such as by adopting tougher listing criteria. 

This is an important milestone in the revitalization of the Tokyo Stock Exchange, which has been in decline due to intense competition from overseas markets. However, the overhaul has left some issues unsolved, including its failure to sufficiently narrow down companies that qualify for the Prime section.

The hope is that TSE will undergo constant reform, and listed companies will boost competitiveness and pursue management that increases corporate value through steady growth.

Ribbon-cutting ceremony celebrating the new market divisions at the Tokyo Stock Exchange on April 4, 2022 (photo by Shunsuke Sakamaki, Sankei.)


The restructuring replaced the First Section, Second Section, Mothers, and JASDAQ with the top-tier Prime section for global companies, the Standard section for mid-sized companies, and the Growth section for emerging companies.

The distinction between market segments had been unclear — the former First Section, for example, had companies of varying sizes. To solve this issue, the listing criteria have been toughened for the Prime section by requiring that the company’s market capitalization of tradable shares be at least ¥10 billion JPY (about $79.6 million USD), with a tradable share ratio of at least 35%. Companies are also required to improve corporate governance by increasing the ratio of outside directors. 

Some companies that meet the criteria for the Prime section deliberately choose the Standard section so that they can focus their resources on their core business rather than spending the effort needed to remain in the Prime section, such as disclosing information in English. A company should take advantage of the characteristics of the market in which it is listed.

But the problem with the overhaul is the transition process. A company listed in the former First Section that doesn’t meet the criteria for the Prime section can still earn a spot as long as it submits a business plan to meet the criteria in the future. And there is no deadline for this transition. With 16% of companies listed in the Prime section not meeting its listing criteria, the top-tier market is not looking all that different from the former First Section. 

Monitor of the Tokyo Stock Exchange displaying the three categories of Prime, Standard and Growth on April 4 (photographed by Ikue Mio)

Ethical Transitions

The TSE needs to indicate the deadline for the transition as soon as possible. It should also consider raising the market capitalization threshold to further distinguish the position of the top-tier market, which will provide more clarity for investors. 

There have been a series of scandals involving TSE-listed companies, including market manipulation in violation of the Financial Instruments and Exchange Act by executives and some employees of SMBC Nikko Securities. 

Whether the investors’ distrust can be dispelled depends on whether TSE and listed companies will be able to commit to reform and increase investment attractiveness.

(Read the editorial in Japanese at this link.)

Author: Editorial Board, The Sankei Shimbun

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