Japan's TOPIX to Get Biggest-Ever Overhaul, Drop 683 Listed Companies and Add McDonald's

JPX Announces TOPIX Constituent Selection Results
Number of constituents to fall 40%, from 1,636 to 986
Criteria: Annual Trading Value Turnover and Free-Float Market Capitalization

The Tokyo Stock Price Index (TOPIX), a key stock index on the Tokyo Stock Exchange, is undergoing its largest-ever overhaul. It will remove 40% of its constituent stocks and add companies with strong growth potential. This is the first major overhaul of TOPIX since the index was launched in 1969.

According to the Nikkei, the Japan Exchange Group (JPX) announced on October 7 that the number of stocks meeting the new criteria for inclusion in TOPIX, which will be revised at the end of this month, will fall by about 40%, from 1,636 to 986.

Passersby are reflected in a stock ticker board at a securities firm in Tokyo, Japan. Tokyo, Japan = Reuters-Yonhap.

A total of 683 stocks are slated for removal. Their weight in TOPIX will be gradually reduced through July 2028, after which they will be excluded. However, if they meet the new criteria in a reassessment in October next year, they can remain in the index with their reduced weighting until then.

Thirty-five stocks will be newly added in the overhaul, including McDonald's Holdings Company (Japan), Ltd., workwear retailer Workman Co., Ltd., and GO Inc., which operates a taxi-hailing app. McDonald's Japan and Workman are listed on the Tokyo Stock Exchange's Standard Market, which is primarily for mid-sized companies, while GO, which went public in June, is listed on the Growth Market for emerging companies.

The new criteria are annual trading value turnover, which indicates how actively a stock is traded, and free-float market capitalization, which refers to the value of shares available for trading on the market. Under the new rules, only stocks that rank within the top 97% of cumulative market capitalization will be included in TOPIX.

The overhaul is part of ongoing efforts by the Japanese government and the Tokyo Stock Exchange to reform the stock market. Under the previous system, virtually every company listed on the TSE First Section was included in TOPIX. As a result, the index once had as many as 2,200 constituents. Critics repeatedly said that funds tracking TOPIX struggled to buy and sell the stocks they needed in a timely manner because the index included a large number of small- and mid-cap stocks with low trading volumes.

In 2022, the Tokyo Stock Exchange reorganized its four existing markets into three—Prime, Standard and Growth—based on company size and growth stage. This time, the aim is to encourage companies to improve their management by excluding from TOPIX those with low trading activity or low market valuations.

One factor behind the overhaul is that the recent rise in Japanese stocks has been concentrated in a handful of large companies related to artificial intelligence (AI). Going forward, even companies listed on the Prime Market, where large corporations are concentrated, may be removed from TOPIX if they fail to meet the inclusion criteria. Conversely, small- and mid-sized companies listed on the Standard or Growth markets may be added if they meet the criteria. The Nikkei interpreted the plan as an effort to encourage companies of all sizes—not just large corporations—to increase their value and thereby improve the competitiveness of Japan's stock market as a whole.

The overhaul is expected to spur competition among Japanese listed companies to increase their corporate value. Assets under management in investment trusts and other funds tracking TOPIX total about 160 trillion yen (1,357 trillion won). Takeaki Homma, a senior fund manager at Mitsubishi UFJ Trust and Banking Corporation, told the Nikkei, "This overhaul will urge Japanese companies to pursue reform and serve as a catalyst for corporate renewal. The companies included in the index will be narrowed down to those that actively engage in dialogue with investors and disclose information."

This content was produced with the assistance of AI translation services.