Japan’s Tokyo Stock Exchange benchmark index will undergo its largest
reconstitution on record, with analysts estimating more than 600 companies could
be phased out. Under a new inclusion rule, firms ranking in the bottom 3% by
free-float market cap among TSE-listed companies as of August will be removed
from the benchmark gradually from October over a two-year window. The prospect
is prompting small-cap issuers to take defensive steps this month; delisting
from the index would likely pressure prices and reduce liquidity. The change
responds to investor complaints that the benchmark contains too many small,
illiquid names and raises replication costs. Mizuho senior quant Akemi Hatano
said some investors are already shorting small caps expected to be removed,
creating scope for short-covering if market odds shift and companies remain in
the index.
