The Tokyo Stock Exchange (TSE) is undergoing a major overhaul, leading to a significant reduction in the number of companies included in its benchmark Topix index. Originally, the Topix included over 2,000 stocks, but by 2028, this number is expected to be slashed to around 1,200. This reform emphasizes liquidity and market capitalization, with companies failing to meet a tradable share market capitalization of less than \10 billion ($67.15 million) facing removal. For instance, in January 2025 alone, 439 companies, including high-end restaurant operator Hiramatsu and several regional lenders, were slated for removal.
This culling disproportionately affects smaller and mid-cap companies, many of which are struggling to maintain investor interest. The "Takaichi trade" and the soaring market capitalizations of AI-related firms like Kioxia Holdings and Murata Manufacturing are drawing capital away from these smaller entities and towards blue-chip stocks. Kioxia's market cap, for example, was more than ten times its late 2025 value at one point in 2026. This trend leaves smaller firms straggling, as money flows into larger, more liquid shares, a phenomenon exacerbated by governance reforms aimed at boosting the appeal of the Japanese market to foreign investors.
The stricter requirements also extend to initial public offerings (IPOs) and listings on the startup market. The number of small-sized IPOs in Japan hit a 12-year low, with only 43 offerings below $50 million. The TSE now requires firms on its startup market to maintain a market capitalization of at least \10 billion after five years, up from \4 billion after ten years. This shift indicates a preference for larger IPOs and established companies that can demonstrate sustainable growth, making it harder for smaller, less-known firms to secure funding and thrive in the reformed market landscape.
