Japan's Topix revamp: 683 stocks to be cut by 2028 in record index shake-up

The first effects will show up at Thursday's close, when around $60 billion of passive trades is forecast to trigger sharp but short-lived price swings and heavy volume in the stocks involved. That can briefly rattle the Topix and individual names, which is why hedge funds have taken positions ahead of time. The quarterly cuts to index weights should, over time, put persistent selling pressure on smaller, less liquid companies and support bigger names such as Kioxia. The gap between Japan's large caps and small caps may widen as a result. The October 2027 re-evaluation gives companies a reason to improve their liquidity and free float, and that could lead more firms to unwind cross-shareholdings and buy back shares. Such a move would align with the corporate-governance push that foreign investors have embraced. One thing to watch is a temporary divergence between the Topix and the Nikkei 225, which is untouched.

Japan is turning the sprawling Topix into a leaner and more investable benchmark. With about ¥166 trillion tied to the index, the overhaul begins with a $60 billion trade on Thursday and runs for two years.

In summary:

• According to the Japan Times, the Topix's biggest-ever restructuring takes effect on October 30, with about $60 billion in passive trading expected at Thursday's close.
• A total of 683 companies that failed the new liquidity and free-float tests will be phased out; their weights are cut in eight quarterly steps, from January 2027 down to zero in October 2028.
• Firms that pass the criteria at an October 2027 re-evaluation will no longer face cuts and will remain members.
• The index is projected to fall from 1,669 members after October to about 986 by mid-2028.
• Daiwa puts passive assets tracking the Topix at about ¥166 trillion, so index funds must sell stocks being removed and buy those being added.
• Bloomberg reported that Kioxia's weight is set to increase, with hopes of around $13 billion in inflows.

This week, Japan's main equity benchmark is going through the biggest overhaul in its history, as Topix changes kick in on Friday, October 30. Around $60 billion of passive trading is expected at Thursday's close as index funds reposition, according to the Japan Times, and the revamp will continue to steer flows into Japanese stocks over the next two years.

The Topix, whose full name is the Tokyo Stock Price Index, has long ranked among the broadest major equity benchmarks, covering a large share of companies on the Tokyo Stock Exchange. That breadth has been criticised because it includes many small, thinly traded firms that are tricky for big investors to buy. Through its first phase, completed in January 2025, the Japan Exchange Group worked to make the index more investable, reducing constituents from around 2,200 to around 1,700.

The second phase is more sweeping. Under the periodic review published on October 7, stocks are now assessed on annual trading value and the market value of shares freely available to investors. Some 683 companies that failed those tests are to be phased out, while dozens of others have been added. Exchange data put the index at 1,636 members at the end of August and 1,669 after October's changes; the tally is expected to drop to 986 once the transition is complete in mid-2028, plus any firms that requalify.

The phase-out is gradual on purpose. The exchange will not remove the 683 stocks in one go; instead, their index weight will be cut in eight quarterly instalments of 12.5 percentage points, beginning January 2027 and reaching zero in October 2028. Companies that qualify at a re-evaluation in October 2027 will keep their place and avoid further reductions. Starting in October 2028, the Topix will be rebalanced every year.

The sums involved are large because so much money follows the benchmark. Daiwa Securities estimates that about ¥166 trillion of passive assets, including index funds and exchange-traded funds, track the Topix. When a stock's weight is reduced, those funds have to sell; when a stock is added or given a bigger weight, they have to buy, no matter the valuation. That mechanical demand is why hedge funds have lined up in advance, the Japan Times reported, hoping to profit from the price moves in affected stocks around the rebalancing.

Some familiar names are set to gain. Kioxia, the memory chipmaker, is expected to see its weighting rise, with hopes of about $13 billion of inflows, Bloomberg reported earlier this month. For companies being phased out, the slow schedule offers time to increase trading liquidity or free float, for example by unwinding cross-shareholdings, in order to requalify.

Analysts see the overhaul as part of Tokyo's wider push to improve corporate governance and valuations. Some argue that focusing the benchmark on larger, more liquid companies could raise the overall market valuation and reinforce the long-standing tilt toward large caps, while smaller companies removed from the index could see weaker passive demand.

For investors, the immediate attention is on Thursday's close, when the first rebalancing trades are due. The longer-term effect will then show up every quarter until 2028, making the overhaul a slow but persistent force on Japanese equity flows.