Japan’s Topix to drop 683 stocks in the biggest overhaul in its history

What’s going on here?

Japan Exchange Group (JPX), which runs the Tokyo Stock Exchange, published the results of the first periodic review under its new Topix rules on Wednesday. According to The Japan Times, 683 companies are slated for removal, including Medley and Ichiyoshi Securities, while 35 stocks will be added, among them McDonald's Holdings Japan and Ferrotec. Changes start to take effect on October 30. Removed stocks will not leave at once: JPX says their weightings will be cut in eight quarterly steps, and the Financial Times (FT) reported that the revamp will leave the index with under 1,000 constituents.

What does this mean?

The Topix has long been one of the broadest major stock benchmarks in the world, with more than 1,600 members before this review. Critics argued it held too many small, rarely traded companies, which made it costly and awkward for funds to copy. The new rules aim to fix that. Under JPX's framework, a company must show enough trading activity relative to its size and rank within the top 97% of the market by free-float value, meaning the value of shares that actually change hands rather than those locked up by parent firms or friendly shareholders.

The biggest shift is that a listing on the Prime Market, the exchange's top tier, no longer secures a place in the index. At the same time, companies on the Standard and Growth markets can now qualify. That is why names such as McDonald's Holdings Japan and Ferrotec, both on the Standard market, are joining. Some of these stocks had already risen ahead of the announcement on expectations of inclusion, according to BigGo Finance.

Money is the reason companies care. Roughly $1 trillion in passive funds tracks the Topix, according to estimates cited by The Japan Times. When a stock leaves the index, those funds eventually sell it; when one joins, they add it to their holdings. JPX is spreading the exit over about two years to soften the impact, and a re-evaluation in October 2027 will let companies that meet the criteria by then stop the reduction in their weighting.

The overhaul is the second stage of a long campaign by the exchange to raise the quality of Japan's stock market. It adds pressure on management teams to unwind cross-shareholdings, raise the share of freely traded stock and pay closer attention to shareholders. The next periodic review is set for October 2028.

The bull case

A leaner index made up of more liquid companies is cheaper and easier for global funds to track, which could make Japanese stocks more attractive to international investors. Newly added firms gain a steady pool of index buyers. And the threat of removal gives managers a strong reason to improve governance, unwind cross-shareholdings and boost shareholder returns.

The bear case

Hundreds of smaller companies face steady selling from index funds over the next two years, which could weigh on their share prices and raise their cost of capital. Some may lack the means to meet the new liquidity rules. A narrower index also concentrates passive money in fewer, larger stocks, leaving Japan's small-cap segment with less natural support.