[Japanese Stocks] Reading the Trends of Growth Market Reforms: Which Stocks Show Investment Appeal? | Revisiting Market Themes. Analysts Uncover the Essence of Themes | Moneyクリ MoneyX Securities' Investment Information and Media Useful for Financial Matters.

The Nikkei average has surged upward all at once. I had expected that timing to be further in the future, but it can be said that the market sentiment has quickly changed. The catalyst was the swift establishment of a ceasefire in the Middle East. In addition to the growing perception of avoiding the expansion of conflict, there have been increasing observations about a "realistic and conciliatory" resolution regarding tariffs, which I believe has contributed to a sense of investment security.

Although there is still a significant sense of uncertainty regarding the domestic economy, it can be seen positively that the initially feared "worst-case scenario" (whether it is truly the worst remains a question) has been avoided. I believe that such corrections will continue in the future, but it should be acknowledged that the impact of tariffs and Japan's rising prices will manifest on the economy at some point. While the music is playing, we should enjoy the dance, but it is also true that the end of the party comes with cleanup.

The TSE Growth Market Index records nine consecutive weeks of bullish candlesticks.

Now, let's focus on the "Growth Market" theme this time. Many of you may have already noticed, but the stock price rise in the Growth Market has been remarkable recently. The Tokyo Stock Exchange Growth Market Index recorded nine consecutive bullish weeks on a weekly basis, with the "Trump Tariff Shock" in early April serving as the bottom, and during this period, the increase rate has exceeded 40%. Meanwhile, the Tokyo Stock Exchange Prime Stock Price Index has risen by about 25% during this time.

Until now, the stock price index of the growth market has been underperforming compared to that of the prime market, but it may finally be said that the growth market is becoming a market where growth is valued, as its name suggests. In this column, I once pointed out this phenomenon by stating that "the stock market is focusing on (the reforms expected in the prime market due to the Tokyo Stock Exchange reforms) rather than (the growth expected in the growth market)." However, it may now be said that a change has begun where the focus shifts from "reform to growth," as it should be.

Two Reasons the Growth Market Has Recovered

However, I believe the situation is not that simple. I think there are two reasons behind this growth market recovery.

One is a series of Trump tariffs. While large prime-listed companies with relatively significant business towards the U.S. face uncertainty due to tariff issues, growth-listed companies seem to be preferred by elimination, as they have a higher weight towards the domestic market.

Another development is the Tokyo Stock Exchange reform, which is expected to also impact the growth market. This involves revising the maintenance criteria for listing in the growth market from "a market capitalization of over 4 billion yen within 10 years of listing" to "a market capitalization of over 10 billion yen within 5 years of listing." Although it is still in the proposal stage, I imagine that similar associations have spread in the stock market, akin to the dramatic change in corporate awareness brought about by the prime market reform, such as increases in dividends and share buybacks.

If these perspectives are correct, it can be said that the shift in focus from "reform to growth" pointed out earlier is not yet significant, and the reality is that it is likely that the expectation of reform (rather than growth) is still driving stock prices. In fact, in the most recent period when the Nikkei average showed movement, the weekly chart of the growth market index formed a bearish candle for the first time in 10 weeks, and its performance has also lost to the prime stock price index. This seems to suggest that growth expectations are still not the main focus.

Aftermath of the Tokyo Stock Exchange's Growth Market Reform

The reform of this growth market may be seen as a response from the Tokyo Stock Exchange, as despite originally being structured as a market for growth stocks, about 40% of the approximately 600 growth-listed companies are actually small-cap companies with a market capitalization of less than 5 billion yen (on the other hand, the ratio of growth-listed companies with a market capitalization of over 10 billion yen accounts for about one-third, highlighting a clear polarization).

Among these small enterprises, there are many cases where the management lacks a significant understanding of the meaning and responsibilities of being listed, and where they accept a simplistic and superficial growth scenario with no evidence of thorough planning, referred to as the "listing goal." The Tokyo Stock Exchange's reform proposals for the growth market likely aim to rectify such situations. Furthermore, the repercussions are quite significant, as companies in the pre-listing phase, which raise doubts about meeting the criteria, are already experiencing difficulties in preparing for listing.

However, from the perspective of entrepreneurs and investors, this is nothing less than a loss of growth opportunities for companies and a reduction in investment options. If it risks undermining the opportunity to nurture young companies that will drive the next generation, there are concerns that it contradicts the true purpose of the capital market. It must be said that the guilt of securities companies that have easily tolerated such "listing goal" companies, which have forced the Tokyo Stock Exchange to embark on reforms, is extremely heavy.

How will companies move with the Tokyo Stock Exchange reform? Screening growth stocks

That said, if a company fails to meet the standards and is delisted, it will be all for nothing. It is predicted that many growth-listed companies will actively move towards securing a market capitalization of 10 billion yen in the future. Companies that neglect growth investments and accumulate large amounts of cash will move towards dividends, and as M&A increasingly pushes management in this direction (for both those who do and those who receive), the investment appeal towards those companies will also increase among growth stocks.

Therefore, focusing on companies with a market capitalization of 75 to 90 billion yen, which are likely to be most aware of achieving the criteria, and screening for those that have posted consecutive operating profits for the last two periods, have a positive outlook for operating profits, and hold net cash exceeding operating profit, we can list companies such as Jay Group Holdings (3063), AIAI Group (6557), Rentrax (6045), Agricultural Research Institute (3541), GMO TECH (6026), Material Group (156A), Dive (151A), Rakiru (4074), CRI Middleware (3698), Zenken (7371), and Metarial (6182).

Similarly, when searching for stocks with a high acquisition appeal and an EV/EBITDA multiple of less than 5 within the same population, companies such as Hakatenn (2173), Trenders (6069), and Nifty Lifestyle (4262) can be listed. It may be said that the future strategies of these companies are worth paying attention to.

Such screening is not a universal stock selection tool (of course, changing the conditions can lead to the discovery of different stocks), but it is indeed very effective as a stock filtering tool. Please also consider investing in line with the trends of growth market reforms from this perspective.