The PFA Drops TOPIX in Favor of the Russell Nomura Prime Index
Japan's Pension Fund Association and other large corporate pension funds have dropped the Topix as their performance benchmark for equity investment and have adopted the Russell Nomura Prime Index. The Topix is an index of all companies listed on the Tokyo Stock Exchange, while the Russell Nomura Prime index consists of the 1,000 most liquid listed companies of the 3,800 companies listed in Japan.
The Tokyo Stock Exchange has been under pressure for some time to introduce an liquidity-adjusted benchmark, but has been very slow in adopting it. At the same time, MSCI, FTSE and other foreign index creators have long ago introduced global liquidity adjusted indices, including indices for the Japanese market that include between 300 and 400 Japanese stocks. It has become a game among position traders to guess which stocks will be added or dropped from the MSCI Japan index, for example, due to the substantial amount of large domestic and foreign pension funds that are indexed to such stock price indices. The MSCI periodically adds/deletes stocks from their indices, which inevitably results in a short-term rise or fall in the price of the affected stocks.
Since all of the public and private pension funds in Japan use the Topix as their benchmark and at least the public pension funds are heavily indexed, essentially all of the 3,800 stocks listed on the Tokyo Stock Exchange were held by pension funds, as the allowable tracking errors vis a vis the benchmarks of these funds are quite tight. This means that prices could be negatively affected for the 3,800 stocks that do not make the minimum liquidity cut for the Russell Nomura Prime Index.