The exchange scrapped its confusing existing segments in early April and created three new sections for the nearly 4,000 companies listed in Japan, including the top-tier Prime segment. But Prime launched with 1,836 members. Some of its members include Brass Corp., a wedding planner in the industrial heartland of Aichi with a market capitalization of $37 million; Tokyo Ichiban Foods Co. Ltd., which operates 75 puffer fish restaurants; and P-Ban.com Corp., a printed circuit board manufacturer with 28 employees. Do these stocks really represent the best of business in Japan?
Investor reaction has been less than kind. “The sinking of the Tokyo Stock Exchange,” said the cover of the weekly Toyo Keizai last week, asking rhetorically, “Are Japanese stocks good enough?”
In other words: when almost everyone is Prime stock, no one is.
There is a feeling that the restructuring is a missed opportunity that won’t happen again anytime soon. The plan began as a grand vision to overhaul Tokyo’s confusing and overlapping market structure and reduce bloat. Investors had complained that the Topix benchmark contained too many companies.
Until Prime, the Topix was made up of companies in the first section of the TSE, as the top tier of companies was known. Saying you (or your recently graduated son or daughter) work at an ichibu jojo kigyo has become synonymous with success – the equivalent of being employed at a Fortune 500 company, at least before everyone wanted to work for a Silicon Valley startup.
But over time, lax entry standards meant that being part of the first section was akin to a participation prize. The number of companies on the index has more than doubled over the past three decades to some 2,172 constituents. Index funds that track the Topix have to buy and sell stocks in hundreds of these low-liquidity minnows.
Compared to the S&P 500, the Chinese CSI 300 or the 40 members of the German Dax, the Japanese benchmark seems ridiculously inflated (the Nikkei 225, but price-weighted, faces different but equally frustrating problems), even though the country’s stock market has largely stalled compared to the United States
The hope was that the market shake-up would fix that problem and help make Tokyo a more attractive place for foreign investors essential to the long-term success of Japanese stocks. Prime promised to be a stopover for the country’s biggest companies, with the exchange promoting a marketplace for companies that value “constructive dialogue with global investors”.
But these initial hopes did not materialize. Criteria for Prime shares ended up being quite lax, including a market capitalization requirement for new listings of just $200 million, and less for grandfathered companies. In contrast, the smallest company in the S&P 500 has a market capitalization of nearly $6 billion, or about 30 times larger.
Worse, the standards were rigged even further: companies that didn’t meet the listing criteria could still apply to be on Prime, simply by submitting a plan that promised to meet the requirements somewhere down the road. Even as the restructuring has taken effect, the TSE has yet to indicate when this “comply or explain” approach will give way to something more biting.
Result: 84% of companies in the first section ended up on Prime. The Topix itself also remains, which is expected to be slightly thinned over an excruciating multi-year period. Where is the reform?
Trading requires patience. Over time, the market will shrink, Tokyo Stock Exchange chief executive Hiromi Yamaji told me in January, as the burden of meeting corporate governance standards weighs heavily. He encouraged investors to focus on the evolution of each company rather than the number of companies.
For now, we find ourselves in a mess. The reorganization did not give any impetus to the market. All three market segments have fallen since its inception. Investors noticed no improvement in paying attention to Tokyo.
A chilling pace of change and a desire to please all parties is a familiar refrain to followers of Japanese reform. But like so many issues facing the country, the luxury of time is no longer on Tokyo’s side as rivals in other countries move faster.
The vision is not wrong. The goal is laudable: market simplification is long overdue. But Japan has real stock market stars — for example, robotic automation specialist Keyence Corp.; Recruit Holdings Co. Ltd., the operator of the largest job search site in the United States; and Daikin Industries Ltd., the air conditioning giant deserve greater global recognition than they are currently receiving. Tokyo needs to round up its authentic collective of superheroes and let them take center stage.
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With borders still closed, Japan risks becoming a ‘pure invention’: Gearoid Reidy
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Gearoid Reidy is a Bloomberg News editor covering Japan. He previously led the breaking news team in North Asia and was the deputy chief of the Tokyo bureau.
More stories like this are available at bloomberg.com/opinion