To gain a firm grasp of success in the Japanese stock market, one must first understand its "central nervous system"—the Japan Exchange Group, commonly known as JPX. According to Wind data, in early March 2024, the total market capitalization of stocks listed on JPX soared above 1,000 trillion Japanese yen, securing its position as the third-largest globally, closely following the United States and China.

As one of the titans of Asian stock exchanges, JPX is not merely a hub for numerous companies to list and trade their shares but also a focal point for investors. It is a marketplace where world-renowned brands like Toyota and Sony shine brightly, alongside a vibrant array of emerging industries and small to medium-sized enterprises.

Understanding the Japan Exchange Group (JPX)—its history, listed company profiles, market capitalization, and dynamics—is key. Let's unpack the essentials of JPX to navigate the market with confidence.

History of JPX

JPX's story dates back to the late 19th century Meiji era. The birth of joint-stock companies and the establishment of the Tokyo and Osaka exchanges in 1878 laid the foundation for Japan's modern stock market, initially funding pivotal sectors like railways and mining.

As Japan's economy boomed, especially during post-WWII industrialization, so did its stock market. Despite the ups and downs of the economic bubble in the 1980s and the challenging decades that followed, JPX's global financial influence persisted.

The 21st century saw a pivotal move in 2013 when the Tokyo and Osaka exchanges merged to form JPX, streamlining operations and enhancing competitiveness. Today, Tokyo leads in spot trading, while Osaka dominates in derivatives.

Amidst a bull market that spanned over a decade, JPX has steadily increased in global prominence, attracting investors from around the world.

JPX business structure and trading products

JPX's business structure predominantly revolves around spot trading in stocks, which is facilitated mainly by the Tokyo Stock Exchange. It features four primary markets: the Prime Market for established blue-chip companies, the Standard Market for well-known mid-sized firms, the Growth Market for dynamic and innovative businesses, and the TOKYO PRO Market, tailored for professional investors.

As of February 2024, the Tokyo Stock Exchange boasts 3,990 listed companies with a combined market capitalization of approximately 1,014 trillion yen. The Prime Market, known for its robust and globally recognized companies, hosts 1,655 firms and commands a staggering 95% share of the total market cap with about 963 trillion yen, drawing significant international investment.

The Standard Market serves as a platform for around 1,613 mid-tier companies with a recognizable presence and business foundation, accounting for roughly 3% of the total market cap at about 30.5 trillion yen.

Although smaller in percentage, these companies are an indispensable force in the Japanese stock market.

The Growth Market serves as a nexus for around 566 up-and-coming firms with innovative technologies, accounting for under 1% of the total market cap at 7.5 trillion yen, yet signaling a promising future.

Beyond stocks, the Tokyo Stock Exchange also engages in bonds, funds, and other investment vehicles. It offers a convertible bond market for general investors and a professional bond market for institutional participants, featuring a variety of convertible and government bonds.

The fund market provides a wide array of index-linked products, including ETFs, ETNs, REITs, and infrastructure funds, with market size indices, sector indices, and many others catering to different investor preferences.

Derivatives trading, on the other hand, is managed by the Osaka Exchange, another critical component of JPX, which offers futures and options services, including index futures, options, government bond futures, options, and individual stock options. Its underlying assets are diverse, encompassing local equity and bond indices, as well as volatility indices and emerging markets worldwide.

Industry composition of JPX-listed companies

In Japan, stock trading is the primary form of investment.

A look at JPX's listed companies reveals a structure similar to the national economy, dominated by Consumer Discretionary, Industrials, and Information Technology sectors, according to Wind.

The largest five firms, namely, Toyota in Consumer Discretionary, Mitsubishi UFJ Financial in finance, Tokyo Electron and Keyence in tech, and NTT in telecoms, lead their fields.

Foreign investors own the largest share of the market at around 30%, followed by investment trusts, including the Bank of Japan's holdings, at 23%. Corporations and individual investors hold about 20% and 18%, respectively.

Foreign entities also lead in trading volume, accounting for 60%, while individuals contribute 20%, and other investors less than 5%. Despite the Bank of Japan's shareholding via investment trusts, it contributes a relatively limited amount to the annual trading volume.

Regarding IPOs, which invigorate the market with new entities, there were 79 new listings on the JPX Group exchanges in 2023, a slight increase from the previous year. The total funds raised through IPOs in 2023 were about 116.4 billion yen, a substantial rise from 2022. Overall, the pace of IPOs on JPX is relatively slow. While its total market cap of listed companies consistently ranks among the top five globally, JPX's IPO fundraising scale seldom makes it into the top five worldwide.

In summary, the Japan Exchange Group (JPX) has grown from a modest exchange in the Meiji era to a central player in global finance. It showcases a mix of established corporations like Toyota and Sony alongside emerging industry innovators.

JPX ranks among the top three global stock markets, offering a broad spectrum of investment options, including derivatives. It has weathered past financial storms and grown through strategic reforms, notably the merger of the Tokyo and Osaka exchanges.

With a bull market and rising foreign investment, JPX's global clout is set to increase, making it a key market for international investors seeking to understand the dynamics of a vibrant capital market.

For those looking to diversify their assets internationally, a deep dive into JPX's business structure, trading products, and the characteristics of its listed companies might be the key to unlocking the potential of this vibrant and challenging capital market.

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