Tokyo Stock Exchange’s Refurbishment Attempt

By Ichiro Suzuki Being listed as a public company in the first section of the Tokyo Stock Exchange gives a special status and prestige to companies that are not household names. It means a lot in the status-conscious Japan. Being there often helps their business, in convincing customers to buy their goods or getting bank loans. This is in part why the Tokyo Stock Exchange’s 1st section is crowded with 2,183 companies at the end of 2021, as opposed to 424 companies in the 2nd section, and another over 1,000 in the two markets, Mothers and Jasdaq, that serve young companies. Majority of those companies not in the 1st section is aspiring to be in there one day. Being aware the congestion in the 1st section, the TSE is making an attempt to make the place a bit more exclusive. On April 1, 2022, the TSE is going to consist of three sections: prime, standard and growth, replacing old outfits. Today’s 1st section companies are requested to apply for a place in the prime or standard market, upon meeting new listing conditions, implicitly discouraging some of the weaker ones not to be in the prime market. As it turned out, of 2,183 companies currently in the 1st section, as many as 1,843, or 84%, have applied to be listed in the prime. Some of them obviously can’t take the ‘shame’ of self-demotion into the secondary, though nicely called standard, market. The TSE has made a clearly stipulated listing conditions that include liquidity of shares and board structure that requires three outsiders as directors. The TSE looked determined to enhance the quality of the prime market, until they let a loophole to allow some of them in the prime without meeting the conditions. The TSE gives a ‘transition period’ for those who are not able to meet the listing conditions immediately. The exchange reports that as many as 296 companies currently in its first section are given a transition status, without mentioning who they are. Even worse, there is no mention of when this ‘grace period’ expires. Some of them can hold onto the prime market indefinitely without fulfilling the conditions. The absence of deadline would discourage some of them from making serious efforts, and hence prevent the TSE from achieving the quality it has wished for. This brings up a question of whom the stock exchange is for. It should be a space to provide investors a place to participate in the capital market, ensuring quality on the listed companies. This purpose is turned upside down obviously. The exchange pursues size in terms of the number of listed companies, at the expense of quality. After all, these companies are the customers to the exchange. Investors might not have to be treated as customers in the absence of competition. Regardless of quality that the TSE offers, it remains the only place that offers investors to buy and sell shares. If this thinking is even in a tiny corner of their minds, the TSE or its holding company Japan Exchange, is utterly behind the times. Large institutional investors have long been trading in privately markets outside of the exchange in this digital age, with a significant cost advantage over the official exchange. Worse, proliferation of less-than-satisfactory companies adversely affects performances of the exchange’s stock index, the TOPIX that is calculated on a weighted average of all the companies in the 1st section, and the prime market, come April. This has already been the case for years and decades, to a certain extent. Finally, Corporate Japan should stop attaching too much value in the status of being in the 1st section, especially if they are not happy with paying costs of being a public company. While the number of publicly listed companies fell by a whopping 40% in the U.S. in the last 30 years, the number rose 30% in Japan over the last ten years. While robust M&A activities are one of the reasons behind this marked fall in the U.S., many management teams chose to take themselves off the market either through management buyout or being bought by private equity firms. Taking a company private gives management much needed flexibility to run it without being scrutinized, or sometimes harassed, by shareholders, notably a small number of noisy activists. Management teams of Corporate Japan are not craving for this path, either, perhaps fearing a new obligation of delivering performances to private equity masters as their new boss, even if such a move could make them wildly wealthy. Perhaps, they would like to keep running the company the way they have always been. They would retire after several years with a reasonably handsome pay by the standard of Japanese salaries men. They think small, and such a mindset makes the Tokyo Stock Exchange a small place, devoid of aspirations.

About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan.