Japanese Stocks Fall as Topix Weighting Announcement Sours Mood

Japanese equities were down for a second day as an announcement about changes to Topix Index weightings prompted selling in stocks set to see their index presence reduced.

The Topix benchmark fell 1.5% to 4,091.46 at close, with banks and electronics companies among the largest contributors to the drag. The tech-heavy Nikkei 225 Stock Average declined 1.4% to 69,042.11.

Kioxia Holdings Corp. rose more than 4% at one point during the day after Japan Exchange Group announced that the memory maker’s free-float weight will rise to 50% from the previous 15% in its regular review. On the other hand, trading house companies such as Mitsubishi Corp. are set to see their weighting on the benchmark decline to 1.4156% from the current level, according to an estimate by Daiwa Securities Chief Quantitative Analyst Junichi Hashimoto in a note.

“Stocks whose weights are likely to be reduced from previous levels, especially the major trading houses, appear to be seeing particularly heavy selling,” said Hiroki Takei, a strategist at Resona Holdings. “After an index event, the negative impact tends to be more visible.”

On top of the weighting changes the Japan Exchange Group Inc., unveiled the biggest-ever reshuffle of the Topix on Wednesday, a revamp that shrinks one of Asia’s broadest major equity benchmarks and intensifies pressure on Japanese companies to boost their market appeal. A total of 683 companies are earmarked for removal and 35 stocks will be added, according to JPX’s announcement.

“The newly added stocks attracted buying early in the morning, but subsequently they were pretty much all sold again,” said Toshiro Sato, president and chief executive officer at Kyokuto Securities Research Institute. “Index-tracking investors won’t actually add or remove these stocks until the end of October,” and so until then, a trend has emerged where investors moved ahead of those anticipated flows with that trade now temporarily reversing, he said.

Inflation worries also weighed on Japanese stocks, as rising oil prices fueled concerns. Brent climbed toward $103 a barrel, while West Texas Intermediate traded near $90. Yields also remained at high levels with the Treasury benchmark 10-year at 5.33%.

Concerns over rising yields remain persistent, with European and US yields staying elevated, said Tomoichiro Kubota, chief market analyst at Matsui Securities. Higher yields are also clouding the outlook for corporate bond issuance and, as a result, even strong earnings may trigger only a limited positive reaction in share prices, he added.