Japan’s equity market overhaul may cut the companies in the benchmark gauge by a few hundred, and that won’t be enough for investors, according to Goldman Sachs Group Inc.

The country’s landmark revamp could reduce the number of stocks in the Topix index by about 450 to 550, Goldman strategist Kazunori Tatebe said. That’s much fewer than initially expected, he said.

“They have undeniably fallen short of investors’ initial expectations, especially regarding hopes for a more streamlined Topix,” Tatebe said in an interview. “We’d hoped the number of stocks could be cut down by quite a bit.”

Market participants have long criticized the Topix for being bloated with too many illiquid companies. The measure currently has 2,156 stocks, many of which are hard to trade. The number is set to drop with the equity market face-lift expected to take place in 2022.

When the plans emerged in 2018, speculation quickly spread about what to expect.

A Toyo Keizai report, for example, said there was a possibility the Tokyo Stock Exchange would limit companies that can list on the market’s main board, called the first section, to those with a market capitalization of at least ¥100 billion ($910 million). That would mean the Topix would be slashed to as few as about 700 stocks, it said. Such stricter rules would boost liquidity and attract more investors to the benchmark index.

But in December, the Financial Services Agency said it was considering another standard. Companies in the main board, to be renamed the “Prime” segment, and the Topix would only have to have a “tradable” market cap, which places emphasis on a stock’s liquidity rather than its outright size, of ¥10 billion, it said.

According to Goldman’s estimates, only about 450 to 550 companies could be excluded by that standard.

The plan isn’t set in stone. Measures such as an upper limit on the number of stocks in the index are still under consideration. If introduced, that could further reduce the companies in the gauge, Tatebe said.

Japan Exchange Group Inc. Chief Executive Officer Akira Kiyota said in December the bourse would like to have “some form of structure” planned by June or July, while the FSA panel said the restructuring could start in the first half of 2022.

Fumiki Harada, a spokesman for the TSE, declined to comment.

The announced guidelines for the Topix revamp are “weaker than thought,” according to Atsushi Kamio, director of the policy research department at Daiwa Institute of Research Ltd. Kamio, like Tatebe, acknowledges that the bourse could still introduce more stringent requirements. But for now, he’s not satisfied with what he sees.

“I would’ve hoped the rules would be stricter,” he said. “Compared to other countries, a benchmark of about 500 stocks or even fewer than that seems good to me.”

The U.S. benchmark gauge, the S&P 500 Index, has slightly more than 500 companies. Hong Kong’s Hang Seng Index has 50 members, while Singapore’s Straits Times measure contains just 30 stocks.

Goldman’s Tatebe said he’s also looking at how the bourse could change the definition of tradable market cap, which is also under review. He expects companies might not be able to count shares held by other firms for the purpose of maintaining a strategic relationship as “tradable.” That would further cut the companies that are eligible for the Topix, he said.

“The reforms are a positive step forward, particularly in terms of simplifying the market structure and the emphasis put on corporate governance,” he said. Whether the Topix ends up with fewer than 1,600 stocks is “something we’re very closely watching,” he said. There are still “too many” companies in the Topix, he said.

In a time of both misinformation and too much information, quality journalism is more crucial than ever.
By subscribing, you can help us get the story right.