From four market segments to three: The April 2022 restructuring

Key points

• April 4, 2022, TSE reorganized the First Section, Second Section, Mothers, and JASDAQ into three markets:Prime, Standard, and Growth.
• The problems before the reorganization were that the roles of each market overlapped, that there was little incentive to maintain high standards after listing, and that the First Section and TOPIX were effectively linked.
• The reorganization laid the foundation for the integrated implementation of stricter continued listing criteria, changes in the definition of tradable shares, governance principles for the prime market, and TOPIX reform.

Why did we review the market segments?

When the TSE and Osaka Stock Exchange spot markets were merged in 2013, the structure of each market remained largely unchanged to limit the impact on existing listed companies and investors. As a result, the First Section, Second Section, Mothers, and JASDAQ coexisted on the TSE. JASDAQ was divided into standard and growth, so some official materials refer to it as “four markets” and, counting subdivisions, as “five categories.”

Over time, two problems became clear.

First, it was difficult to understand the role of each market. The size and growth stage of target companies in the Second Section, Mothers, and JASDAQ overlapped, making it difficult for investors to discern the differences. In the first section of the market as well, it was unclear which companies would be positioned as representative of Japan's market.

Secondly, the mechanism to encourage increases in corporate value after listing was weak. Before the reorganization, there was a large difference between the level required for a new listing and the level required to maintain a listing. In addition, the standards for moving companies from other markets to the First Section were sometimes less strict than those for direct listing on the First Section. Once listed, there was no mechanism in place to encourage companies to maintain high levels of liquidity and governance.

Furthermore, Affiliation in the First Section of the Market and inclusion in TOPIX were in fact linked. Moving to the First Section, the structure was such that it received buying demand for TOPIX-linked funds, regardless of a company's investment grade. In addition to clarifying the role of market segments, it was also necessary to review their relationship with indexes.

From consideration to implementation

In October 2018, the TSE established the “Council on the market structure of the cash market at the Tokyo Stock Exchange”. In December of the same year, an issue paper was published and comments were solicited from December 21, 2018 to January 31, 2019. The issues were summarized in March 2019 based on the opinions received and interviews with market participants.

Afterwards, the Market Structure Specialist Group set up within the Financial Services Agency's Financial System Council examined the entire system. The chairperson is Hideki Kanda, professor at Gakushuin University Graduate School of Law. The official name of the report published on December 27, 2019 is “Report of the Market Structure Expert Group - Towards a new market for companies and investors in the Reiwa era”.

The report indicated the following directions:

• Reorganize market segments into three markets, each with a clear role
• Standardize initial listing standards and continued listing criteria in principle
• Separate the scope of the First Section of the Market and TOPIX
• Differentiating governance levels depending on market segment

The TSE incorporated this policy into its listing system, and from September to December 2021, it allowed existing listed companies to choose the market they would like to migrate to. The selection results were announced on January 11, 2022, and the transition was made all at once on April 4 of the same year.

What is the difference between the three markets?

TSE's approach to each market is as follows.

• Prime market: For companies that have the scale and liquidity to be investment targets for many institutional investors, have a higher standard of governance, and aim for sustainable growth and medium- to long-term improvement in corporate value through constructive dialogue with investors.
• Standard market: For companies that have a certain size and liquidity as public market investment targets, have basic governance standards as a listed company, and aim for sustainable growth and medium- to long-term improvement in corporate value.
• Growth market: For companies that disclose their business plans and progress in a timely and appropriate manner to achieve high growth potential and receive a certain level of evaluation from the market, but whose business performance is relatively high risk.

It is easy to see the difference when comparing the main Listing Maintenance Standards.

The important thing here is not to confuse listing examination standards and continued listing criteria. Some of the items that are examined at the time of initial listing, such as profit amount, sales, and number of years of business continuity, are set separately from the standards for maintaining listing. The significance of the reorganization is not to make the two completely the same, but to bring the standards closer than before and to maintain a state that is commensurate with the characteristics of the market even after listing.

Number of companies at launch

The number of listed companies as of April 4, 2022 was as follows.

Since Prime alone accounted for almost half of the total, there was criticism right after its launch that it was difficult to see the difference from the First Section. The background to this is that in addition to the fact that existing listed companies have independently chosen the transition destination, a transitional measure has been established that allows companies that do not meet the normal standards of the selected market to apply the relaxed standards if they submit a compliance plan.

Transition from old market to new market

The transition wasn't just a name change. The general flow is shown in the figure below.

flowchart LR
    A["Approximately 2,180 companies in the first section of the market <br/>"]
    B["Approximately 470 companies in the second market <br/>"]
    C["mothers"]
    D["JASDAQ Standard"]
    E["JASDAQ Growth"]

    P["Prime market <br/>1,839 companies"]
    S["Standard market <br/>1,466 companies"]
    G["Growth market <br/>466 companies"]

    A --> P
    A --> S
    B --> S
    D --> S
    C --> G
    E --> G

    classDef oldSeg fill:#f4f1ea,stroke:#7a6d4a,color:#3a3320
    classDef newSeg fill:#e6efe1,stroke:#3d6b3a,color:#1f3a1d
    class A,B,C,D,E oldSeg
    class P,S,G newSeg

Companies in the first section of the market were divided into prime and standard. Market 2nd Section and JASDAQ Standard have mainly moved to Standard, and Mothers and JASDAQ Growth have moved to Growth. For this reason, the old market and new market do not correspond one-to-one.

Three mechanisms that increased the effectiveness of reorganization

1. Change in the definition of tradable shares

Under the new system, the scope of tradable shares when determining the criteria for maintaining listing has been revised. Some stocks considered to be stably held, such as those held by banks, insurance companies, and business corporations, are now excluded from the list of tradable shares, making it more difficult for companies with large cross-shareholdings to meet the criteria. More details will be covered in the next article.

2. Governance principles for prime markets

The 2021 Corporate Governance Code revision required prime listed companies to take even higher measures. The main items are as follows.

• Appoint at least one-third of independent outside directors
• Enhancing climate-related disclosures under the TCFD or equivalent international framework
• Disclose necessary information in English as well
• Use the electronic voting platform for institutional investors

These were not uniform legal obligations, but were implemented as a "comply or explain" code. However, there are some areas that have since become mandatory under the listing rules, such as the simultaneous Japanese and English disclosure of timely disclosure that began in April 2025.

3. Separation from TOPIX

Before the reorganization, TOPIX basically covered all stocks on the First Section of the market. After the reorganization, constituent stocks were selected with an emphasis on liquidity, independent of market segments. As a result, prime listing alone no longer guarantees inclusion in TOPIX. Details are covered in 3.4.

Why did the review continue even after the reorganization?

Although the foundation of the system has changed with the launch of the new market, the number of prime companies remains large, and the deadline for transitional measures was initially set to be for the time being. In order to make the differences between market segments substantive, it was necessary to clarify how long and what procedures would be used to deal with companies that did not meet standards.

Therefore, in July 2022, TSE established a follow-up meeting regarding the review of market classification. Discussions at the conference led to concrete proposals such as the end of transitional measures, the request for management to be conscious of cost of capital and stock prices, the functioning of growth markets, and additional reform of TOPIX.

The reorganization in April 2022 did not complete the reforms. It was the starting point for a long process of reviewing market segments, continued listing criteria, governance, and indexes as a single system.

Suggestions for IR personnel

1. Market segments is explained not only by company size but also by investor base and governance choices. Prime listing means opting for greater liquidity, governance and dialogue with international investors.
2. Understand new listing standards and continued listing criteria separately. Explaining profit standards as requirements for maintaining listing would misrepresent the system.
3. Continuously check the breakdown of tradable shares. Not only the stock price, but also who owns the stock is directly linked to maintaining market segments.
4. Manage market segment and TOPIX inclusion separately. Prime listing and index inclusion are no longer the same decisions.
5. Read follow-up meetings as leading indicators of institutional change. The main measures for 2023 and beyond are being fleshed out from the materials and discussions held at the conference.

Source/reference materials

• Japan Exchange Group “Summary of Market Segmentation Review”: https://www.jpx.co.jp/equities/improvements/market-structure/01.html
• Japan Exchange Group “Consideration of market structure”: https://www.jpx.co.jp/equities/improvements/market-structure/index.html
• Financial Services Agency “Regarding the publication of the report of the Financial System Council’s Market Structure Expert Group” (December 27, 2019): https://www.fsa.go.jp/singi/singi_kinyu/market-str/report/20191227.html
• Japan Exchange Group “Market Segment”: https://www.jpx.co.jp/equities/market-restructure/market-segments/index.html
• Japan Exchange Group “Announcement of market segment selection results” (January 11, 2022): https://www.jpx.co.jp/corporate/news/news-releases/0060/20220111-01.html
• Japan Exchange Group “Listing Maintenance Standards (Prime Market)”: https://www.jpx.co.jp/equities/listing/continue/outline/01.html
• Japan Exchange Group “End of transitional measures regarding continued listing criteria”: https://www.jpx.co.jp/equities/follow-up/04.html
• Japan Exchange Group “Announcement of Revised Corporate Governance Code” (June 11, 2021): https://www.jpx.co.jp/news/1020/20210611-01.html

Related articles

• 2.3—Revised in 2021: Governance principles for the prime market introduced prior to market restructuring.
• 3.2――tradable-share ratio: A mechanism that connects market segments standards to the reduction of cross-shareholdings.
• 3.3 - Listing maintenance rules after the end of transitional measures: How the special provision that was supposed to be "for the time being" was changed to a time-limited system.
• 3.4---TOPIX reform: Reform that separates market segments and index adoption.
• 4.1 -- How to read PBR below 1x: Request from TSE in March 2023, born from follow-up after market restructuring.