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Tokyo Stock Exchange eyes 'prime' market for global blue chips

Reform plan faces strong opposition from companies fearing demotion

The Tokyo Stock Exchange faces calls to streamline its bloated first section, but companies fear being dropped from the big board. (Photo by Wataru Ito)

TOKYO -- The Tokyo Stock Exchange's now-sprawling first section would be reserved exclusively for companies with the scale and governance to attract global investors, under an outline of the market's biggest shakeup in decades.

The TSE's existing boards would be recast into a "prime" market for blue chips, a "standard" market for midtier companies and a startup-focused "growth" board, according to a proposal discussed Wednesday by a Financial Services Agency council.

The Financial System Council, which debates important policy changes, envisions the prime market showcasing Japan's foremost companies.

The controversial reorganization addresses criticism that the Tokyo exchange's current structure lacks clarity about the role of each market.

Tokyo ranks third, behind the U.S. and Chinese peers, in terms of total stock market capitalization. But the median value of TSE-listed companies comes to only around $440 million, compared with around $2 billion on the New York Stock Exchange and about $1.3 billion on the London Stock Exchange.

Assignments to the proposed prime market would be based on factors such as market capitalization, trading volume and governance. Special allowances could be made for high-growth tech companies, which tend to lose money in their investment-heavy early stages.

The council stopped short of proposing numerical qualifications for the new markets amid strong opposition from listed companies loath to be demoted from the big board. The TSE's prestigious first section spanned 2,155 companies at the end of October, 58% of all issues on the bourse, which is run by Japan Exchange Group.

A revamp of the first section would coincide with a narrowing of the Topix index, tracked by huge international funds. Companies fear that not making the cut would send their shares plummeting as these funds rebalance.

No time frame has been set for carrying out any of these reforms, though a report covering the proposals is expected by year-end.

The council raised the idea of letting companies now on the first section migrate to the new prime market under certain conditions.

But "if they don't properly prune the first-section companies that proliferated so wildly, nothing will change," said Shingo Ide of NLI Research Institute.

The reform effort suffered a setback earlier this year when it was discovered that a participant in confidential discussions leaked information to Nomura Securities.

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