Tokyo Stock Exchange considers reorganizing markets

The Yomiuri Shimbun

A man walks in front of the Tokyo Stock Exchange in Chuo Ward, Tokyo.

By Tomohide Makishi and Ryosuke Terunuma / Yomiuri Shimbun Staff Writers The Tokyo Stock Exchange is considering reorganizing the divisions among its stock markets, and will compile within the year at the earliest a proposal for reorganizing four markets — TSE’s First Section and Second Section, Jasdaq and Mothers.

The Shanghai Stock Exchange has exceeded the TSE in terms of trading value, and the Tokyo market’s international presence continues to decline. The TSE hopes to use its reorganization to bring in investors and make a comeback.

First Section crowded

“We will analyze the particular features and ideal form of each market. We want to clarify their similarities and differences,” said Akira Kiyota, chief executive officer of Japan Exchange Group, Inc. (JPX), at a press conference on Nov. 30. JPX has the Tokyo Stock Exchange under its umbrella.

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  • The Yomiuri Shimbun

  • The Yomiuri Shimbun

It has been five years since the TSE merged with the former Osaka Securities Exchange, and the proper state of the market will be reviewed.

The biggest task is fixing the baroque structure in which about 2,100 companies, or 60 percent of the about 3,600 listed on the TSE, are concentrated in the First Section. Massive companies like Toyota Motor Corp., which has a market capitalization of more than ¥20 trillion, share this section with companies with a capitalization of single-digit billions.

The image of the First Section as a market containing the most highly elite companies is a thing of the past.

This situation narrows investors’ choices. There are many investment trusts linked to TOPIX, the key index showing the overall price movements of the First Section, but when they contain a mix of companies that differ greatly in such areas as size and future prospects, it is sometimes difficult for investors’ profits to rise.

People connected to the market often say there are too many differences between the more than 2,000 companies in the First Section, and that it is difficult to call it a benchmark in comparison to foreign indexes.

Based on these concerns, an idea has arisen during the current discussions of establishing a “premium market” for top companies with especially large market capitalization.

‘Negative legacy’

The unclear distinction between Mothers and Jasdaq, both aimed at emerging companies, also confuses investors.

Jasdaq’s predecessor was the over-the-counter registration system established by the Japan Securities Dealers Association in the 1960s, which allowed buyers and sellers to directly trade stocks without going through an exchange. Mothers is a new market established by the TSE in competition with Jasdaq in 1999.

Jasdaq became a subsidiary of the Osaka Securities Exchange, after which the Osaka exchange was integrated with TSE. Thus Jasdaq and Mothers came to coexist within the same exchange, a situation that could be called a “negative legacy” of the merger.

This strikes a contrast with the U.S. Nasdaq market, which has fostered high-tech companies such as Microsoft Corp. and Intel Corp.

The TSE Second Section is a jumble of long-established businesses and start-up companies. It has taken on an element of being a “rehabilitation market” for companies like Toshiba Corp. that have fallen into excessive debt, been demoted and are seeking to rejoin the First Section.

Based on this situation, the TSE is considering the possibility of merging the Second Section with Jasdaq and Mothers.

Hurdles remain

The possible reorganization of the TSE is being examined by a panel of experts, but hurdles remain to actually implementing such change.

Many investment trusts have been set up to correspond to the current market divisions. Large-scale reorganization would affect asset management, according to a company in that field, such as having to replace stocks with other stocks. There is also likely to be opposition if certain companies are demoted from the First Section as the result of reorganization.

“There will be more money from investors if the market divisions become easily understandable to foreign stockholders as well,” said Sadakazu Osaki, a fellow at Nomura Research Institute, Ltd. who is well versed in capital markets. “If the exchange becomes easily understandable overseas, it will lead to the exchange’s winning out in international competition.”


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