The Ultimate Guide to The Tokyo Stock Exchange

The Tokyo Stock Exchange or TSE serves as the central marketplace for trading equities, derivatives and other securities in Japan. Established in 1878, the TSE had a market capitalization of 743,877 billion Yen with 1,835 prime companies and 1,444 standard companies listed on the exchange, as of March 2023. 

In this article, we discuss everything about the Tokyo Stock Exchange in-depth. 

What is the Tokyo Stock Exchange?

The Tokyo Stock Exchange (TSE) is Japan's largest stock exchange and is situated in the capital city of Tokyo. It operates under the management of the Japan Exchange Group. 

The TSE lists a diverse range of companies spanning across various sectors such as technology, finance, manufacturing, automotive, and more. There are different market segments to accommodate companies based on their size, liquidity, and growth potential. 

The TSE holds significant global importance due to Japan's status as the world's third-largest economy. The TSE's trading volumes and market capitalization are among the highest globally. It attracts a wide range of domestic and international investors, including institutional investors, retail traders, and foreign investors.

History of the Tokyo Stock Exchange

After its initial establishment in 1878, the Tokyo Stock Exchange (TSE) merged with eleven other major Japanese city stock exchanges in 1943 to form a unified Japanese Stock Exchange. This was later closed in August 1945, just days before the Hiroshima bombing. 

The TSE then reopened under its current name on May 16, 1949, following the implementation of the new Securities Exchange Act.

Between 1983 and 1990, the TSE experienced an unprecedented surge, becoming the world's largest stock exchange, accounting for over 60% of global stock market capitalisation. However, it subsequently suffered a significant decline in value, due to the sharp hike in interest rates by the Bank of Japan, to cool down the Japanese real estate market. Eventually, TSE was ranked as the fourth-largest exchange in the world based on the market capitalisation of listed shares. 

In 2001, the TSE restructured itself as a Kabushiki Gaisha (stock company), shifting from its previous structure as an incorporated association with its members as shareholders. Furthermore, on June 15, 2007, the TSE acquired a 4.99% stake in Singapore Exchange Ltd. for $303 million.

Understanding Japan's Stock Market Index (JP225)

Japan's Stock Market Index 225, also known as Nikkei 225, is a price-weighted index consisting of Japan's top 225 blue-chip publicly-owned companies from various industries traded on the Tokyo Stock Exchange. Similar to the Dow Jones Industrial Average (DJIA) in the United States, the Nikkei has been calculated since September 1950, with retroactive data dating back to 1949. 

Renowned companies such as Sony Corporation, Canon Incorporated, and Toyota Motor Corporation are among its constituents. As the oldest stock index in Asia, the Nikkei was established as part of Japan's post-World War II rebuilding and industrialisation efforts. Unlike many other indexes, the Nikkei stock ranks its constituent stocks based on share price rather than market capitalization, with valuations denominated in Japanese Yen. 

When trading the Nikkei 225, traders should monitor the US markets closely, as developments affecting the United States are likely to have a direct impact on the Nikkei. 

Nikkei's connection to the US market is largely influenced by Japan's exports to the United States. Additionally, traders of the Nikkei should align their strategies with those who track US market movements and indices. 

The Nikkei index Japan exhibits high sensitivity to global events, including political unrest, economic and financial news, war, as well as natural disasters. Key economic indicators such as interest rate changes, unemployment rates, GDP figures, and level of job creation have significant influences, particularly when they occur in Japan and the United States. Therefore, it is advisable to stay informed about the dynamics of the S&P 500 and the Dollar Index.

Market restructuring of the Tokyo Stock Exchange 

In April 2022, the Tokyo Stock Exchange announced its plans to restructure its current market structure. 

The main reason for that has been the declining state of Japan's stock market, as compared to the growing regional markets in Asia.

Starting April 4, 2022, three new market segments were introduced: the ‘Prime Market,’ ‘Standard Market,’ and ‘Growth Market.’ This restructuring aimed to enhance clarity and provide stronger incentives for listed companies to sustainably increase their corporate value.

• Prime Market: Designed for companies with sufficient market capitalization and liquidity to serve as investment instruments for institutional investors. Constructive dialogue with investors is a central focus for companies in this segment.

• Standard Market: Intended for companies with an appropriate level of market capitalization and liquidity to be traded on the open market. These companies are expected to maintain a basic level of corporate governance as expected of listed companies and are committed to achieving sustainable growth and improving medium- to long-term corporate value.

• Growth Market: It is targeted towards companies that have a certain level of market value and disclose business plans that outline growth potential along with their progress towards achieving those plans in a timely and appropriate manner. 

Through these market segments, the TSE aims to provide clarity and distinct categorization for companies based on their market capitalization, corporate governance practices, commitment to sustainable growth, and level of investment risk.

Things to should know about the Tokyo Stock Exchange

Trading hours

The Tokyo Stock Exchange (TSE) operates on a schedule divided into two main trading sessions. The morning session begins at 9:00 am and concludes at 11:30 am. After a break, the afternoon session commences at 12:30 pm and concludes at 3:00 pm. During these trading sessions, orders are accepted within specific periods. 

• The order acceptance period for the morning session starts at 8:00 am and continues until 11:30 am. 
• Similarly, for the afternoon session, the order acceptance period begins at 12:05 pm and extends until 3:00 pm. 

It is important to note that trading on the TSE is not conducted on certain days, including Saturdays, Sundays, national holidays, and specific dates, such as January 1 to January 3 and December 31, when the market remains closed.

Trading units

The Tokyo Stock Exchange (TSE) has determined the trading units for domestic stocks based on the units specified in the articles of incorporation of each listed company. Currently, the trading units for domestic stocks stand at 100 shares. The TSE has been actively working towards standardizing the trading units to 100 shares to create a market that is user-friendly and beneficial for investors. As a result of these efforts, the trading units for domestic stocks were officially normalized to 100 shares in 2018.

Transaction types

There are three types of transactions for domestic stocks: regular transactions, cash transactions, and when-issued transactions. Regular transactions are the most common and straightforward. 

• Settlement for regular transactions occurs on the third business day after the transaction date (T+2).
• Cash transactions, on the other hand, involve settlement on the same day as the transaction. However, cash transactions are only available for cross trading.
• When-issued transactions are specific to newly issued shares resulting from capital increases and stock splits. They are conducted from the ex-dividend day until two days prior to the issuance of new shares. Regardless of the trading date, settlement for when-issued transactions takes place two days after the last trading day of when-issued transactions.

Transaction methods 

The TSE equities market offers two primary types of orders: market orders and limit orders.

• Market orders: These orders are placed by investors who wish to trade securities at the available prices in the market. Market orders prioritize execution speed over price, aiming to swiftly complete the transaction.

• Limit Orders: Conversely, limit orders allow investors to specify a particular price at which they are willing to trade securities. Investors set a maximum/minimum price they are willing to pay/accept when trading. Limit orders provide greater control over the execution price but may take longer to be filled if the specified price is not currently available in the market.

Daily price limits

The daily price limit restricts price fluctuations within a specified Yen range during a single trading day. These limits are primarily determined based on the previous day's closing price.

The daily price limits are generally expanded on the subsequent business day (the third business day), only if either of the following conditions occurs for two consecutive business days:

• The price reaches the upper or lower limit, and no ‘closing auction at the limit price’ (mechanism used by the TSE to match and execute orders at the daily price limit during the closing hours) takes place, while trading volume remains zero.
• No shares are traded until the end of the afternoon session, but some shares are traded during the afternoon session closing auction at the upper or lower limit, with bids or offers still at the upper or lower limit.

Special quotes parameter 

To prevent sudden and extreme price fluctuations, a special quote is triggered when prices appear to potentially exceed a specific price range, known as the special quote parameter, from the last execution price. This special quote parameter serves as a safeguard against short-term volatile price movements, ensuring stability in the market.

Top companies in Japan listed on Tokyo Stock Exchange

• Toyota Motor Corporation: Listed on TSE in 1949, it is one of the world's largest automakers, with a 11.4% average 5 year return on invested capital in the market.

• Nippon Telegraph and Telephone Corporation: Listed on TSE in 1986, it is a major telecommunications company with a 464% price hike in share price over the last ten years. 

• Sony Corporation: Listed on TSE in 1958, it is a global leader in entertainment and technology, with a notable presence in the stock market by giving around 35% returns in the last three years.

• Keyence Corporation: Listed on TSE in 1989, it is a renowned manufacturer of automation and sensing equipment, providing 13.72% five-year average returns. 

• Mitsubishi UFJ Financial Group: A prominent financial institution, it was listed on TSE in 2001 and share prices are up by 29.55% from last year.

• Softbank Group: Listed on TSE in 1998, it is a multinational conglomerate known for its investments in technology and telecommunications, with a significant 19.91% return on equity on average. 

Trade the Tokyo Stock Exchange

Looking ahead, the TSE continues to evolve and adapt to the changing dynamics of the global financial landscape. It remains a significant player in the international stock market, fostering economic growth and providing opportunities for investors to participate in Japan's vibrant economy.