Tokyo Stock Exchange Sees Record Delistings in Quality Drive

The Tokyo Stock Exchange (TSE) is set to see a record number of delistings in 2024, with 94 companies expected to depart the market, marking the first-ever annual decrease in the number of listed companies, reports Nikkei Asia. This surge in delistings is part of a broader effort by the exchange and investors to improve the overall quality of listed businesses, aiming to attract more international investment.

The TSE, formed in 2013 through the merger of the Tokyo and Osaka exchanges, is witnessing an increase in delistings across its three markets: Prime, Standard, and Growth. The number of companies leaving the market this year will exceed last year's total by 33.

New listings are also expected to be significantly lower, with only around 80 companies projected to join the exchange. This is primarily due to sluggishness in the Growth market. As a result, the TSE is expected to end 2024 with approximately 3,842 listed companies, one less than the previous year.

Many companies choose to delist to gain greater management flexibility or following acquisitions by other businesses or investment funds. The recent privatization of Taisho Pharmaceutical Holdings exemplifies this trend, with the owning family stating that remaining listed "would likely become an obstacle to the implementation of medium- to long-term measures such as upfront investment and fundamental restructuring."

The TSE is actively promoting reforms to enhance the attractiveness of the Japanese market, leading to increased pressure on listed companies. In 2022, the exchange tightened listing maintenance rules, and in 2023, companies were encouraged to operate with greater awareness of their capital costs and stock prices.

Activist shareholders are also playing a more prominent role, demanding greater accountability from businesses. As of October, the consultancy IR Japan has recorded 66 shareholder proposals by activists this year, highlighting their growing influence.

The TSE's shift towards prioritizing quality over quantity is reflected in the increasing ease of hostile takeovers, driven by the decline in cross-shareholdings among Japanese companies.

Beyond 2024, the TSE is implementing stricter listing standards, phasing out transitional measures after March 2025. This includes raising the bar for market capitalization requirements and potentially tightening standards for the Growth market, potentially forcing underperforming companies to exit.

The shrinking number of listed companies is not unique to Japan, with similar trends observed in the US and Europe. The increasing cost of maintaining a listing and the availability of alternative funding sources in private markets are contributing to this global trend.

While the shrinking market may not necessarily indicate an increase in high-growth companies on the TSE, "companies that choose to remain on the market will face increasing pressure to achieve growth that exceeds the cost of listing," notes Kazunori Tatebe of Goldman Sachs Research.