Tokyo Stock Exchange (TSE)

The Tokyo Stock Exchange (TSE) is the heart of Japan's financial world and the country's largest stock exchange. Nestled in the bustling financial district of Kabutocho, Tokyo, it stands as one of the most significant exchanges globally by total market capitalization of its listed companies. Founded in 1878, the TSE has a long and storied history, mirroring Japan's economic journey from post-war miracle to a modern, high-tech powerhouse. Today, it is part of the larger Japan Exchange Group (JPX) following its 2013 merger with the Osaka Securities Exchange. For investors, the TSE is the primary gateway to investing in some of the world's most iconic and innovative companies, from automotive giants like Toyota to gaming legends like Nintendo. It offers a diverse landscape of opportunities, tracked by two famous barometers: the Nikkei 225 and the broader TOPIX index. Understanding the TSE is essential for anyone looking to diversify their portfolio internationally and tap into the potential of the Japanese market.

The TSE isn't just a single marketplace; it's a structured system designed to accommodate companies of various sizes and stages of growth. In April 2022, the exchange underwent a major restructuring to simplify its layout and improve clarity for investors.

The old, slightly confusing sections were reorganized into three distinct markets:

• Prime Market: This is the top tier, home to Japan's largest, blue-chip, globally-active companies. These firms are expected to maintain a high level of corporate governance and engage actively with international investors. Think of this as the major league.
• Standard Market: This section lists well-established domestic companies with solid business foundations. They have a proven track record but may not have the global scale of the Prime Market companies. They form the solid backbone of the Japanese economy.
• Growth Market: As the name suggests, this is for startups and emerging companies with high growth potential but also higher risk. These companies are focused on innovation and future expansion, making them the venture capital wing of the public markets.

When you hear news about the Japanese stock market, you'll almost always hear one of two names. It's crucial to know the difference.

• Nikkei 225: This is the most famous Japanese index. It is a price-weighted index of 225 top-tier companies, similar in construction to the Dow Jones Industrial Average (DJIA) in the United States. Because it's price-weighted, companies with higher stock prices have a bigger impact on the index's movement, regardless of the company's actual size.
• TOPIX (Tokyo Stock Price Index): This is a market capitalization-weighted index, much like the American S&P 500. It includes all domestic companies from the former “First Section” (now mostly the Prime Market), making it a much broader and more representative measure of the overall Japanese market. Value investors often prefer the TOPIX as it provides a truer picture of the market's health.

For disciples of Benjamin Graham and Warren Buffett, Japan has long been a fascinating, if sometimes frustrating, market. It offers a unique blend of deep value and untapped potential.

The allure for a value investing enthusiast is strong. Here’s why:

• World-Class Companies: The TSE lists some of the best-run, most globally competitive businesses on the planet, often with fortress-like balance sheets.
• “Net-Net” Hunting Ground: Japan has historically been one of the best places in the developed world to find “net-net” stocks. These are companies trading for less than their net current asset value (current assets minus total liabilities) – a classic sign of deep undervaluation.
• The Corporate Governance Revolution: For decades, many Japanese companies were famous for hoarding cash and ignoring shareholder return. However, a major push from the government and the TSE itself is forcing companies to focus on improving return on equity (ROE) and returning cash to shareholders through dividends and buybacks. This “great unwinding” of lazy balance sheets is creating incredible opportunities for patient investors.

Investing in Japan isn't without its hurdles. Being aware of them is the first step to success.

• Information Gaps: While improving, finding English-language financial reports and investor materials can still be challenging for smaller companies.
• Cultural Differences: Japanese corporate culture, with its emphasis on consensus and long-term stability, can sometimes seem slow-moving to Western eyes. The complex web of cross-shareholdings known as keiretsu, though weakening, can still influence corporate decisions.
• Macroeconomic Picture: Japan has grappled with an aging population and periods of deflation for years. These are powerful macroeconomic headwinds that any investor must consider when evaluating a company's long-term prospects.