An Introduction to the Japanese Stock Market

There are currently 3,755 companies listed across all sections of the Tokyo Stock Exchange.

The Tokyo Stock Exchange has a combined market cap of JPY 693,689 bn (USD 6,674 bn) which makes it the third-largest exchange in the world and the largest in Asia.

In this article, we will introduce the key things to know about the Japanese stock market.

Overview

The Japanese stock market is operated by the Japan Exchange Group, Inc. (JPX), which was established on January 1, 2013, after combining the Tokyo Stock Exchange Group and Osaka Securities Exchange. According to its website, JPX business is to operate financial exchange markets with the aim of providing platforms for the trading of listed securities and derivatives.

JPX provides oversight of the markets through a self-regulatory and independent body, the Japan Exchange Regulation. It also runs a central depository, Japan Securities Clearing Corporation, to allow for the clearance and settlement of transactions. The two main exchanges operated by JPX are the Osaka Exchange and the Tokyo Stock Exchange.

Indexes

The most commonly used indexes that measure the Japanese stock market are the Nikkei 225 and the TOPIX Index. We cover these as well as some others in this post.

Osaka Exchange

The Osaka Stock Exchange Co., Ltd. was established and regulated in 1878 and then combined with the Tokyo Stock Exchange to form the JPX in 2013. In 2014, it was renamed Osaka Exchange, Inc. (OSE) and became the primary Japanese derivatives market. Apart from acting as a market and exchange for financial derivatives, OSE also provides other services including publication of quotations and prices.

Interestingly, the world’s first institutional futures exchange (Yodoya-Komeichi) was established in Osaka during the Edo period as an exchange for rice and crops. In 1730 it was moved to Dojima and officially named the “Dojima Rice Exchange”.

Tokyo Stock Exchange

The Tokyo Stock Exchange, Inc. (TSE) is also run by the JPX and is the largest financial instruments exchange in Japan. Under the Financial Instruments and Exchange Act of Japan, it provides a market and exchange for the buying and selling of securities.

It is important to note that the Tokyo Stock exchange has an acronym of TSE, not to be confused with the Toronto Stock Exchange, which has an acronym of TSX.

The Tokyo Stock Exchange operates and maintains the TSE 1st Section, 2nd Section, Mothers, TOKYO PRO Market, and JASDAQ. In total, the Tokyo Stock Exchange has a market cap of JPY 693,689 bn (USD 6,674 bn) which makes it the third-largest exchange in the world and the largest in Asia.

As of January 6th Jan 2021, there were a total of 3,755 companies listed across all sections and markets of the TSE.

Tokyo Stock Exchange is headquartered in the Kabuto-cho district of Tokyo. In Japan, the Kabuto-cho district is synonymous with the financial markets just like Wall Street in the US and the City of London in the UK.

The Tokyo Stock Exchange was founded on May 15, 1878, as the “Tokyo Stock Exchange Co., Ltd.”. In 1943, all existing stock exchanges in Japan were merged together to form the “Japan Securities Exchange”. This was disbanded in 1947 and two years “Tokyo Stock Exchange” in its present form was established.

In 2013 it was acquired and merged by the Japan Exchange Group, Inc, and the Tokyo Stock Exchange became the primary market for stocks and securities in Japan. Its derivatives market was integrated with the Osaka Exchange, while Osaka Exchange’s cash equity market and self-regulatory operations were merged with the TSE.

Apart from stocks, TSE also acts as a market for a variety of securities such as ETFs and ETNs that track local and foreign stock indices, REIT indices, and commodity indices. The exchange has been trying to expand its range of security offerings so that it can provide more diversified asset classes. As a regulatory and oversight body, it also ensures the smooth and stable operations of markets.

The Tokyo Stock Exchange has also invested a lot in its IT infrastructure and its cash market trading system “arrowhead’ is considered to be one of the best trading systems in the world.

At the end of June 2020, Tokyo Stock Exchange’s board members were President and CEO Kiyota Akira and directors Yokoyama Ryusuke, Kohda Main, and Miyahara Koichiro.

As we mentioned earlier, the Tokyo Stock Exchange operates five markets namely, the First Section, Second Section, Mothers, JASDAQ, and TOKYO PRO Market.

First Section and Second Section

These are the main board of the Tokyo Stock Exchange and collectively the First Section and Second Section are called the “Main Markets”. The first section lists all the leading large listed Japanese and foreign companies while the second section consists of all the second-tier companies. The first section accounts for a major portion of trades in the TSE and sees large liquidity.

The first section has a market cap of JPY 666,862 bn (USD 6,416 bn) with a total of 2,186 companies listed at the end of 6th January 2021. The largest companies are Toyota Motor Corporation, Softbank Group, Keyence Corporation, and Sony Corporation; and the largest sector is “electric appliances” with a market cap of JPY 104,709 bn.

The second section has a market cap of JPY 6,845 bn (USD 66 bn) with a total of 476 companies listed. Toshiba Corporation is the largest company in the second section.

Mothers

The Mothers (an acronym of “Market of the high-growth and emerging stocks”) consists of all the companies that are currently too small to make the main markets. Essentially these are companies with great growth potential hoping to be reassigned to the First Section.

In order to become a part of Mothers, TSE assesses the company’s growth potential by analyzing its business model and the environment of the sector it operates in.

Mothers offers financing opportunities to companies and many have moved up to the First Section over the years. Mothers was founded in 1999 as part of the Tokyo Stock Exchange. It has a market cap of JPY 9,497 bn (USD 91.3 bn) with a total of 347 companies listed. A few of the popular companies on Mothers are Mercari,Inc., RAKUS Co.,Ltd. and BASE,Inc.

JASDAQ

JASDAQ has a similar purpose to Mothers but has different listing requirements. It used to be a part of the Osaka Stock Exchange and it is not be confused with the US-based Nasdaq exchange.

JASDAQ is bifurcated into 2 markets, the Standard market for growth companies that have a defined size and performance, and the Growth market that consists of companies with unique business models or technology that have the potential for stronger growth. JASDAQ has a market cap of JPY 10,420 bn (USD 100bn) with a total of 705 companies.

TOKYO PRO Market

The TOKYO PRO Market is only available to professional investors and was introduced in 2008 after an amendment in the Financial Instruments and Exchange Act. It has a market cap of just JPY 66 bn (USD 0.64 bn) and consists of 41 companies.