July 2024

Letter from SuMi TRUST – The Impact of the Proposed TOPIX Revisions

By Hiroyuki Ueno, Chief Strategist
The Number of TOPIX Constituents will be Significantly Reduced
The Tokyo Stock Exchange Stock Price Index (TOPIX), which was launched in 1969, is widely used both inJapan and overseas as a market average benchmark for the overall Japanese market. According to theJapan Exchange Group (JPX), which owns the Tokyo Stock Exchange (TSE), TOPIX-linked assets amounted
to JPY 83 trillion as of March 2023.
The JPX released its proposed TOPIX revision on June 19th [1], which was the second phase of the revision.
Originally, the TOPIX index was composed of all stocks listed on the First Section of the Tokyo Stock
Exchange. The index included stocks with small market capitalisation and low liquidity, and these stocks
are automatically purchased and supported by investment trusts, pension funds and exchange tradedfunds (ETFs) that aim to track the TOPIX index through passive management, which was viewed asproblematic.
In the first phase of the revision, the calculation method was revised to enhance TOPIX’s functionality as
an investable index when the TSE First Section was eliminated as part of the April 2022 TSE market
reclassification. In the review, small issues with a tradable share market capitalisation [2] of under JPY 10billion were excluded, and now their weighting in the index is being reduced in stages. By the end ofJanuary 2025, when the review is completed, the number of TOPIX constituents will be reduced fromapproximately 2,100 to about 1,700.
In the second phase of the revision announced last month, the index will be expanded to cover all market
segments (Prime, Standard and Growth markets) to ensure continuity and improve broad coverage. Inaddition, to enhance the functionality of TOPIX as an investment, a reshuffling of stocks will be conducted
once a year in accordance with the criteria that places even greater emphasis on liquidity. By July 2028,
when this review is completed, the number of TOPIX constituents will be reduced to approximately 1,200.
While the index will still hold more stocks than the S&P 500 Index and the Stoxx 600 Index, it will be easierfor investors to manage.

-1-July 2024

TOPIX Market Reforms
CurrentNew Scheme
Prime Market, Standard Market and Growth Market

Eligible Markets

Prime Market

Periodic Review

None

Annually

Number of Stocks*

Around 1,700

Around 1,200

Total Market Capitalisationof Floating Shares

JPY 434 trillion

JPY 430 trillion

Median Market
Capitalisation ofFloating Shares

JPY 35 billion

JPY 73 billion

Approximately 50 stocks will be selected from theStandard and Growth markets.

*The estimated number of constituents during the market segmentation reorganisation process (of stocks formerly
listed on the First Section of the TSE), and the estimated number as of the completion of the first stage review (endof January 2025)

Effects and Expectations of the TOPIX revision
The revision will require listed companies to further increase their corporate value. Until now, once acompany was included in TOPIX, it was expected to be held semi-permanently by passively managed
index funds and entities. But after the revision, it will be excluded from TOPIX and its shares will be sold if
the price slumps. It will likely be necessary to increase market capitalisation by pursuing growth, or byincreasing liquidity by unwinding cross-shareholdings, which are excluded from the JPX liquidity criteria.
In addition, paving the way for companies listed on the Standard and Growth Markets (i.e. not on the PrimeMarket) to be included in TOPIX will provide an incentive for such emerging companies to raise their stockprices.
From another perspective, institutional investors who passively manage Japanese stocks currently exercise
voting rights for over 2,000 companies. But after the revisions, they will be able to concentrate on fewer
companies. Through deeper dialogue between companies and investors, a positive impact on thegovernance of Japanese companies can be expected.

-2-July 2024

References[1] JPX Market Innovation & Research, Inc., 19 June 2024, ‘Overview of Revisions of TOPIX and OtherIndices’, e_data1.pdf (jpx.co.jp)[2] The tradable share market capitalisation is the total market value of shares (excluding treasury stock,shares held by management, etc.) on the market, and is calculated by multiplying the number of shares incirculation by the share price.

About the Author
Hiroyuki Ueno, Chief Strategist
Hiroyuki Ueno joined SuMi TRUST in 2002 and has
been Chief Strategist since October 2017.
With over 20 years’ experience in the investment
industry, he is well-versed in the asset managementbusiness and has a strong network in the industry as
well as among financial authorities.
Hiroyuki’s primary focus is macroeconomic andfinancial market analysis. His insight is based on hisown analysis combined with information collectedfrom his broad network, which is widely acclaimed.
Hiroyuki is a Certified Member Analyst of theSecurities Analysts Association of Japan (CMA).
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