The Tokyo stock market trumpets its largest overhaul in decades to lure more foreign investors. Still, the bourse is missing something such investors have long awaited -- companies with great growth potential.

The bourse operator, Tokyo Stock Exchange Inc., on Monday reorganized its four trading sections into three -- Prime, Standard and Growth -- for the roughly 3,800 listed companies to be categorized under more distinctive rules to sharpen the focus of each market.

The reform came as Japan tries to cement a foothold for the Tokyo market as an international financial hub after its reputation was tarnished by a trading system failure in 2020 that caused an unprecedented full-day trade halt. The setback came in stark contrast to the rise in its U.S. and some Asian peers.

Investors and market observers say they find the shake-up less than attractive, saying they are looking more for companies that create innovations to stand out among global competitors than for improving market availability.

"There is definitely sentiment among investors that there are markets in other Asian countries with many attractive companies," Hidetaka Kawakita, an honorary professor at Kyoto University who specializes in stock market analysis, said. "Compared to them, Japanese companies seem to boast little growth and little increase in stock value."

The reorganization is designed to specify the concepts of each of the three new sections to make it more convenient for investors to pick which stocks to buy. The operator also aims to encourage listed companies to pursue growth more persistently and strengthen governance to raise their corporate value, by imposing higher requirements for market capitalization and outside directors.

The TSE last carried out a large-scale restructuring of its trading sections in 1961 when it introduced the First Section and Second Section.

A ceremony is held at the Tokyo Stock Exchange to mark the reorganization of the market into three trading segments on April 4, 2022, a major reform aimed at imposing stricter listing standards and attracting more foreign investment. (Kyodo) ==Kyodo

The top-tier Prime section, equivalent to the former First Section, is made up of 1,839 companies, or over 80 percent of the total listed on the previous leading section, and centers on inviting global investors.

A company in the new top division must have floating shares worth at least 10 billion yen ($81.6 million) that account for 35 percent or more of its outstanding shares.

About 300 companies have yet to meet the listing criteria for the Prime section, stricter than for the Standard section for midsize firms and Growth section for up-and-comers. But their shares can be traded in the section, pending improvement in operations based on business plans they submitted to the bourse prior to the market section revamp.

"It's more cosmetic than anything else," said Masakazu Takeda, a portfolio manager of Hennessy Japan Fund, which manages a total asset of about $801 million as of December and is run by California-based Hennessy Funds.

"What's the point if you have 2,000 plus companies on the First Section of the TSE and a few years down the road you still have roughly the same number of listed names?" he said. "It's not going to help foreign investors sift through the universe."

Foreign investors are of great importance to the TSE, making up about 70 percent of the trading value on the former First Section.

According to data by the World Federation of Exchanges, the Tokyo Stock Exchange had a market capitalization of domestic shares worth $6.17 trillion as of February. The value came fifth among global stock exchanges but makes up only a quarter of the New York Stock Exchange, the world's largest bourse home to names like Visa Inc., Johnson & Johnson and Coca-Cola Co.

The Tokyo bourse was also behind the U.S. Nasdaq stock market, home to the tech giants known as GAFA including Google LLC and Apple Inc., the Shanghai Stock Exchange and the Euronext, a pan-European bourse.

The reorganization "is not a solution for this, and not hitting a right point at all. A sense of urgency to change is what is missing in Japan," Masakazu Hosomizu, partner and portfolio manager at U.S. firm RMB Capital, said.

He said that foreign investors pour their capital in high-quality Japanese companies that meet their own criteria in areas such as corporate governance and capital efficiency.

Toyota Motor Corp., the world's largest automaker by volume, had its market capitalization briefly top 40 trillion yen or about $330 billion for the first time in January, ahead of other global names in Japan like Sony Group Corp. and SoftBank Group Corp.

But it was still far behind Apple that became the world's first company to top $3 trillion in January or U.S. electric carmaker Tesla Inc. with over $1 trillion in market capitalization.

Kyoto University's Kawakita sees the reorganization as a "fine-tuning" rather than a reform but a "first step" in creating change in the Japanese market.

He said he hopes the bourse will go on to implement tougher standards for listed companies in the future, such as requiring a market capitalization of 100 billion yen to have major Japanese companies understand that they cannot stay on the top tier without growth.

Hosomizu at RMB Capital said that the TSE should impose tighter listing rules to prompt companies to bolster corporate governance and the monitoring of their management. The TSE could demand hiring more outside directors than the current one-third of the board members required of companies on the Prime section.

Akira Kiyota, the chief executive of Japan Exchange Group Inc., the parent of the TSE, expects the shake-up and stricter requirements to incentivize listed companies to improve their corporate value.

"I have high expectations that this reform will be a motivator for companies to work on their corporate value," he said at a regular press conference last week. "I would like to see the Prime market consist of companies that can attract global investors as its concept states."

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