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      Markets

      Tokyo Stock Exchange restricts top tier membership to blue chips

      Reform aims to allow money to flow into Japan's most competitive companies

      The Tokyo Stock Exchange intends to require that companies maintain a market value of roughly $224 million to remain on the first board. (Photo by Yuki Nakao)

      TOKYO -- The Tokyo Stock Exchange's plan to purge smaller companies from its first section is an attempt to reform the bourse into a home for true blue chips, shaping it to be more similar to the London Stock Exchange or Euronext.

      Once reformed, the TSE hopes to see money, including public funds, flow into the exchange's most-deserving elite companies. Up to around 30% of the listings would be slashed through the move.

      The minimum market capitalization required to list on the first section will be raised 12.5-fold to 25 billion yen ($224 million), from the current 2 billion yen.

      To ensure that the premier section is up to global standards, the TSE will require all companies on the first section to disclose quarterly earnings in English, compared with the approximately 35% that do so now. The TSE will pressure companies to adhere to strict corporate governance rules.

      At over 2,100 listings, the number of companies listed on the first section has doubled over the past 30 years. In comparison, the London bourse has just over 500, and Euronext hosts roughly 300. The less-than-exclusive nature of Tokyo elite market has been a contributing factor to the waning global interest in Japanese equities.

      Under current rules, companies in the lower-ranked TSE second section or the startup-heavy Mothers market can move up to the first section if they hit a market cap of 4 billion yen. That has resulted in a host of smaller companies upgrading to the top league and consequently dragging down the average capitalization of the first section to 57 billion yen.

      Euronext boasts an average capitalization more than 10 times that number, while the figures for the LSE and Nasdaq outweigh the first section by a factor of two or three.

      Raising the first section's qualifying market cap to 25 billion yen would cull 720 companies, simple arithmetic shows. The tighter listing requirements are expected to send investment flowing to companies with proven excellence.

      One aspect of the revisions would be to guide more public money, which the first section is awash with, to blue chip companies. The TSE's largest investors -- such as Japan's Government Pension Investment Fund, the world's largest pension fund, which handles 27 trillion yen; and the Bank of Japan, which has poured roughly 16 trillion yen into exchange-traded funds as part of its ultraloose monetary policy -- engage in passive investing.

      The transition likely will take at least three years, since the change would severely impact those companies on the fundraising and employment fronts.

      Meanwhile, concentrating public funds in a smaller, select group of companies could make the BOJ a major shareholder in a growing lineup of corporations. This change could force the central bank rethink its stock-purchasing policy.

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