Weekly Brief: Will Structural Reforms Energize the Tokyo Stock Exchange?

Background

On April 4, 2022, the Tokyo Stock Exchange underwent market restructuring with three new market segments: Prime Market, Standard Market, and Growth Market.

Market Segment	Concept of the market segment	Listing Criteria of the market segment
Prime Market	For companies which have appropriate levels of market capitalization (liquidity) to be investment instruments for many institutional investors, keep a higher quality of corporate governance, and commit to sustainable growth and improvement of medium- to long-term corporate value, putting constructive dialogue with investors at the center.	Liquidity: Basic criteria to ensure effective basis of ample liquidity for various types of institutional investors to find the stocks investable Governance: Basic criteria to ensure effective foundation for constructive dialogue between listed companies and institutional investors Business Performance/ Financial Status: Stable and Excellent Revenue/Financial Base
Standard Market	For companies which have appropriate levels of market capitalization (liquidity) to be investment instruments in the open market, keep the basic level of corporate governance expected of listed companies, and commit to sustainable growth and improvement of medium- to long-term corporate value.	Liquidity: Basic criteria to ensure appropriate liquidity for smooth trading by public investors Governance: Basic level of governance structure to achieve sustainable growth Business Performance/ Financial Status: Stable revenue foundation and financial status
Growth Market	For companies which have a certain level of market value by disclosing business plans for realizing high growth potential and their progress towards these appropriately and in a timely manner, but at the same time pose a relatively high investment risk from the perspective of business track record.	Liquidity: Minimum criteria to ensure appropriate liquidity for smooth trade by public investors Governance: Governance standard appropriate to the level of size of business and growth stage Business Plans: A business plan to realize high growth potential and that enables investors to make reasonable investment decisions based on information disclosed

Diminishing TSE presence

Japan’s stock market is no longer a world leader and is losing ground to Asia’s regional market. During the asset bubble period, the market capitalization of TSE increased to about ¥190 trillion in 1985, comparable to the market capitalization of NYSE at that time, which was ¥244 trillion. In 1989, the market cap of TSE even exceed the NYSE’s. However, following the collapse of the bubble, the market cap has been on a downward trend. As of March 2022, the market cap of TSE is about one-quarter the size of NYSE or NASDAQ.

Largest stock exchange operators worldwide as of March 2022 (Source: Statista)

Only the Market Can Promote Corporate Reform

The stagnation of the Japanese stock market is largely due to the poor earnings of Japanese companies. Over the same period of time since 1990, Japanese companies’ aggregate sales were incomparable to the US firms, where the US have seen their sales triple. As gross profit margin has changed little in Japan, sales declining in relative terms, then the value-added of companies has also declined. The effect of declining value-added would mean that the wages of workers will not increase as well. Thus it becomes necessary for market reforms to drive changes in increasing wages in Japan, which ultimately lead to increases in the value-added by companies. Prime Minister Kishida Fumio is examining tax policies that would boost wages.

But still, the stock market reform will be a base to protect Japan’s economy, especially for companies that issue shares. Only shareholders can have a direct impact, and the market can put these shareholders into action. Unless this market is unable to reform itself independently, this can cause future diminishing confidence in Japan’s Economy.

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References

Japan Exchange Group. (n.d.). Overview of Market Restructuring. https://www.jpx.co.jp/english/equities/market-restructure/market-segments/index.html

Kaya, K. (2022, April 3). Can Structural Reforms Revive the Tokyo Stock Exchange? Nippon.Com. https://www.nippon.com/en/japan-topics/g02079/#:%7E:text=The%20Tokyo%20Stock%20Exchange%20will,ground%20to%20Asia’s%20regional%20markets.