Tokyo Stock Exchange (TSE)

The Tokyo Stock Exchange (TSE) (also known by its Japanese name, Kabutochō) is Japan's primary stock exchange, located in the heart of Tokyo. As one of the largest and most influential stock exchanges in the world by market capitalization, the TSE is the premier marketplace for buying and selling shares of Japanese companies. Founded in 1878, it has a long and storied history, playing a pivotal role in Japan's economic journey from post-war recovery to global powerhouse. In 2013, the TSE merged with the Osaka Securities Exchange to form the Japan Exchange Group (JPX), a holding company that now operates both markets, solidifying its position as a cornerstone of Asian finance. For any global investor, understanding the TSE is essential, as it lists thousands of companies, from world-renowned giants like Toyota and Sony to a vast universe of smaller, often overlooked businesses, offering a rich hunting ground for investment opportunities.

To get a feel for the Japanese market, you need to know how it's measured and organized. The TSE provides several tools and structures to help investors navigate its vast landscape.

Just as American investors watch the S&P 500, investors interested in Japan follow two main indices to gauge the market's health:

• Nikkei 225: This is the most famous and widely quoted index for the Japanese stock market. It's a price-weighted index, similar to the Dow Jones Industrial Average, meaning that stocks with higher share prices have a greater impact on the index's value, regardless of the company's actual size. It tracks 225 of Japan's top-tier, “blue-chip” companies across various industries. While it's a great quick snapshot, its price-weighting can sometimes give a skewed view of the overall market.
• TOPIX (Tokyo Stock Price Index): The TOPIX is arguably the more comprehensive and representative benchmark. It's a capitalization-weighted index, much like the S&P 500, meaning a company's influence on the index is proportional to its total market value. The TOPIX tracks all domestic companies listed on the TSE's “Prime Market” (formerly the First Section). For investors seeking a truer measure of the entire Japanese market's performance, the TOPIX is the superior guide.

In April 2022, the TSE restructured its market segments to improve clarity and corporate value. The old, somewhat confusing sections were replaced with three new, distinct markets:

1. Prime Market: This is the top tier, home to Japan's largest, most established, and globally-active companies. These firms are required to meet the highest standards of liquidity and corporate governance, making them the most visible to international investors.
2. Standard Market: This section is for established domestic companies with a solid business base and sufficient liquidity and governance to be publicly traded. It offers a broad range of investment opportunities beyond the giants in the Prime Market.
3. Growth Market: As the name suggests, this is the home for emerging companies with high growth potential. These are often younger businesses focused on innovation, but they come with higher risk. Think of it as the TSE's hub for venture-style public companies.

For decades, Japan has been a fascinating, if sometimes frustrating, market for value investors. However, recent changes have made it one of the most compelling places in the world to hunt for bargains.

The classic principles of value investing—finding good companies trading for less than they're worth—apply beautifully in Japan. Following Japan's asset bubble burst in the early 1990s, the country experienced its “Lost Decades,” a long period of economic stagnation. This created a unique environment where:

• Balance Sheets are Fortresses: Many Japanese companies became extremely conservative, hoarding cash and avoiding debt. It's not uncommon to find stable, profitable businesses with more cash on their balance sheet than their entire market value.
• Stocks Trade Below Book Value: A deeply ingrained corporate culture that often prioritized stability and stakeholders (like employees) over shareholder return led to countless companies trading at a fraction of their intrinsic worth. For a value investor, this is like finding a gold mine.

The most exciting recent development for value investors is the TSE's own crusade to unlock this hidden value. The exchange has explicitly called on companies trading with a price-to-book ratio (P/B Ratio) below 1x to develop and disclose plans to improve their valuation. A P/B ratio below 1 means a company's stock is valued at less than the net assets on its books—a classic sign of undervaluation. This institutional pressure is forcing a monumental shift. Companies are now actively looking at ways to boost shareholder returns through stock buybacks, increased dividends, and more efficient use of capital. This proactive stance from the exchange itself acts as a powerful catalyst for value realization. It's no wonder that legendary value investors like Warren Buffett have made significant investments in Japanese trading houses, signaling a renewed confidence in the market. For the savvy investor, the sun is truly rising again on value opportunities in Japan.