Tokyo Stock Exchange Reorganization Faces Growth Bottleneck as Small-Cap Market Lags
Four years after the Tokyo Stock Exchange (TSE) overhauled its structure into three distinct segments, the market's attempt to enforce corporate discipline and clarify segment concepts presents a tale of contrasting outcomes, according to analysis by the Daiwa Institute of Research.
While the flagship Prime market has successfully aligned with its initial concept—attracting greater foreign institutional investment—the Growth market continues to struggle with severe underperformance and fundamental structural issues.
Following the April 2022 restructuring, total listings on the TSE peaked in fiscal year 2023 and have since accelerated downward as delistings outpace new initial public offerings (IPOs). Rising compliance costs, heightened activist scrutiny, and stricter listing maintenance criteria have pushed a growing number of companies off the exchange. The slowdown in IPOs is particularly pronounced in the Growth market, following the announcement of tighter listing retention standards.
A clear contrast has emerged across market segments:
- Prime Market: Foreign ownership of shares has steadily climbed, fulfilling its target role as a liquidity-rich venue designed for constructive dialogue with global institutional investors.
- Standard Market: Retail investor participation has increased, serving as a secondary venue for mature companies with stable liquidity.
- Growth Market: Retail ownership has declined while corporate holdings have risen. Crucially, the segment has suffered from prolonged price stagnation.
Despite being designated for high-potential companies, the Growth market has seen its constituent book value per share (BPS) remain flat, effectively failing to deliver actual corporate growth compared to the Prime and Standard segments.
A major driver behind this stagnation is the phenomenon of "IPO goals," where listing serves primarily as an exit strategy for founders and venture capital firms rather than a launchpad for future expansion. Data reveals that only 6% of Growth market companies have grown their market capitalization by ten times or more since listing, while 44% have fallen below their initial post-IPO valuations. The median market capitalization for companies in the segment stands at just 6.4 billion yen. Furthermore, post-IPO secondary public offerings remain exceptionally rare, particularly among smaller-cap firms.
In response, exchange regulators have launched a series of reforms, including raising listing maintenance thresholds (requiring a 10 billion yen market cap after five years, up from 4 billion yen after ten) and forming dedicated study groups to support startup expansion.
While surveyed Growth market companies cite challenges such as resource constraints, low liquidity, and insufficient contact with institutional investors, analytical findings emphasize that operational growth must precede investor interest. Institutional investors and sell-side research coverage require minimum thresholds of market capitalization and trading volume.
For the TSE’s market overhaul to fully achieve its original mandate, the Growth segment must successfully transition into a true springboard for expanding businesses.
Norbert Gehrke
