Key points

  • TOPIX was originally a free-float market capitalization weighted index covering all stocks listed on the First Section of the Tokyo Stock Exchange. Even after the market reorganization, existing constituents were retained and reviewed in stages to reduce the impact on investors.
  • Phase 1 (October 2022–January 2025) reduced the weights of stocks with tradable-share market capitalization below ¥10 billion in ten quarterly steps. The number of constituents fell from about 2,200 to about 1,700.
  • In Phase 2, the first periodic replacement will take place in October 2026. Different criteria apply to new inclusions and continuing constituents, selected across Prime, Standard and Growth. The number of constituent stocks is estimated to be approximately 1,200 upon completion of migration.

Why is TOPIX reform integrated with market segments reform?

The old TOPIX was designed as an index that broadly covered the stocks listed on the First Section of the Tokyo Stock Exchange. If a company is listed on the First Section of the Tokyo Stock Exchange, it will, in principle, be included in TOPIX and will receive buying demand from TOPIX-linked funds. While this system is easy to understand when looking at the market as a whole, as the number of stocks on the First Section of the Tokyo Stock Exchange increases, the composition of the index and the liquidity of the investment target no longer necessarily match.

The Financial System Council's “Market Structure Expert Group” report in December 2019 pointed to the direction of separating market segments and TOPIX composition. Market segments is a system that determines the positioning of listed companies and standards for maintaining them listed, and indexes are investment indicators that represent the groups of stocks that can actually be bought and sold by managed funds. There is no necessity to continue operating both on the same basis.

Based on this idea, JPX is promoting reforms to balance TOPIX's market representativeness and functionality as an investment target. As of the end of March 2024, the assets under management linked to TOPIX have reached approximately 110 trillion yen, and a large change in constituent stocks at once would have a large impact on the market. For this reason, the reform is being implemented in two stages.

Stage 1 (October 2022 to January 2025) - Step by step narrowing down existing stocks

At the time of market reorganization in April 2022, JPX continued to use the constituent stocks of the old TOPIX, regardless of whether they were transitioned to Prime, Standard, or Growth. This is because priority was given to the continuity of the index.

Stocks assessed as having tradable-share market capitalization below ¥10 billion were designated for gradual weight reduction. Their weights were reduced in ten quarterly steps from the end of October 2022 to the end of January 2025. An October 2023 reassessment allowed improvements in tradable-share market capitalization to be reflected.

As a result of this transition, the number of constituent stocks in TOPIX decreased from approximately 2,200 before the reform to approximately 1,700. Gradually reducing smaller constituents’ weights, rather than immediately excluding them, spreads index-linked fund trading over time and reduces abrupt effects on individual stocks.

Stage 2 (from October 2026) - Periodic reshuffling independent of market segments

In the second stage, the TOPIX population expands not only to the prime market but also to three markets: Prime, Standard, and Growth. Market segment itself is no longer a criterion for recruitment, and stocks are selected based on ease of trading and free float market capitalization.

The first periodic replacement will be held in October 2026, the second in October 2028, and thereafter periodic replacement will be conducted every October. Stocks that are not continuously included in the initial reshuffling will have their weights reduced in eight steps every quarter from October 2026 to July 2028. There will be a re-evaluation in October 2027, and stocks that meet the continuation criteria will no longer receive weight reductions.

Criteria for new and continued recruitment

The next TOPIX will be divided into Additional Criteria, which applies to companies that are not constituent stocks, and Continuation Criteria, which applies to companies that are already constituent stocks.

indicators Additional criteria Continuation criteria
Annual trading value turnover rate 0.20 or more 0.14 or higher
Cumulative ratio of free float market capitalization Top 96% Top 97%

The reason why the continuation criteria are looser than the additional criteria is to prevent constituent stocks from being replaced frequently due to slight numerical changes. The index is designed to gradually replace illiquid stocks while maintaining index stability.

The annual trading value turnover rate is not simply "annual trading value ÷ market capitalization at the end of the period." It is calculated by summing the monthly turnover rate for the most recent 12 months, and the median daily trading value at the trading session of the TSE, the number of business days, and the free-float market capitalization at the end of the month are used for each month's turnover rate. The cumulative ratio of free-float market capitalization is also calculated among stocks that meet turnover criteria and are not delisted stocks or stocks on special alert.

“Trade stock” and “float stock” are not the same thing.

The traditional shares used in the continued listing criteria for a market segment and the float shares used to calculate TOPIX are similar in concept, but are not the same. Tradable shares are defined based on the TSE's listing system and are used to determine the criteria for maintaining listing. On the other hand, TOPIX adjusts the index weight using the free-float ratio based on the calculation guidelines of JPX Research Institute.

Therefore, even if the tradable-share ratio improves, it does not necessarily mean that the free float ratio of TOPIX or the selection decision will move in the same range. The sale of cross-shareholdings and changes in the composition of major shareholders can affect both, but the IR department needs to check the calculation method for each separately.

Phase 1 and 2 schedule

period Content Estimated number of constituent stocks
Before reform In principle, stocks from the First Section of the Tokyo Stock Exchange are adopted. Approximately 2,200
October 2022 - January 2025 Stage 1. Reduce the weight of target stocks in 10 steps Approximately 1,700
February 2025 - September 2026 Transition period after completion of stage 1 Approximately 1,700
October 2026 Initial periodic reshuffling of the next TOPIX ―
October 2026 - July 2028 Reducing the weight of transition measures stocks in 8 steps Estimated reduction to approximately 1,200
October 2027 Re-evaluating transitional measures stocks ―
After October 2028 Second regular replacement. Conducted every year thereafter Approximately 1,200 expected

The number of approximately 1,200 is an estimate, and the actual number of constituent stocks will vary depending on market conditions at the time of periodic reconstitution and irregular additions/exclusions. Even so, it is clear that the number of stocks will be narrowed down significantly compared to before the reform, and the index will change to one that explicitly reflects the ease of buying and selling.

What will change for listed companies?

Most importantly, market segments and index inclusion result in different evaluations. Companies in the standard and growth markets can also be included in the TOPIX if they meet additional criteria. On the other hand, even companies in the prime market may be removed from the TOPIX if their liquidity and free-float market capitalization do not reach the continuation criteria.

However, companies should not think that they can definitely "get indexed" with short-term measures alone. The trading value depends on investor demand, and there are unique calculation methods for determining the free float ratio. Stock splits and reverse stock splits generally do not increase the free-float market capitalization itself unless the shareholder structure or corporate value changes. It is appropriate to view index compliance as the result of medium- to long-term efforts such as diversifying the shareholder base, enhancing information disclosure, continuing dialogue with investors, and improving business value.

Suggestions for IR personnel

  1. Manage market segments and TOPIX adoption separately. Prime listing and TOPIX constituent stock will become independent from now on. Do not confuse the two even in internal documents.
  2. Do not confuse additional criteria with continuing criteria. 0.14, top 97% will be applied to existing constituents, and 0.20, top 96% will be applied to new candidates.
  3. Check the calculation of tradable shares and free-float shares separately. Do not directly use the listed maintenance criteria values for TOPIX determination. Refer to the index calculation guidelines and free float ratio calculation method as necessary.
  4. The schedule includes initial replacement in October 2026 and re-evaluation in October 2027. If the stock falls under transitional measures, it will be possible to explain to investors how the weight reduction will proceed and the conditions for re-evaluation.
  5. Do not treat index adoption as a short-term stock price measure. Improving liquidity is achieved through information disclosure, expanding the investor base, shareholder composition, and increasing corporate value. IR, finance, and corporate planning need to work on a common premise.

Source/reference materials

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