Japan’s small-cap cull is an opportunity for AI-enabled funds

By the Editorial Team · Thursday, October 8, 2026

Japan Exchange Group is removing nearly 700 small-cap companies from the Topix index to streamline it and make it more appealing for institutional investors managing about $1 trillion tied to the index. This change highlights a broader market trend where AI-driven investment strategies are emerging to effectively analyze and capitalize on opportunities in smaller companies often excluded from major indices.

Japan's stock market is undergoing a significant restructuring as the Tokyo Stock Exchange’s operator, Japan Exchange Group (JPX), moves to remove nearly 700 small-cap companies from the Topix index due to their limited market size. This reform aims to simplify the index and make it a more attractive investment vehicle for institutional investors managing approximately $1 trillion in funds linked to the Topix.

The Topix currently includes over 1,600 companies, spanning from Mitsubishi UFJ Financial, valued at $272 billion, down to Prored Partners, a management consultancy worth just $22 million. The small-cap constituents identified for removal account for about 3 percent of the total market capitalization of the index. This follows an earlier cull in 2025 that saw around 500 smaller companies eliminated. The smallest firms are considered costly and difficult to trade and have minimal influence on the overall index performance.

The reduction reflects a broader challenge faced by investors globally, where equities at the smaller end of the market are numerous but require substantial analytical effort to identify promising investment opportunities. BlackRock estimates that there are more than 6,000 small-cap companies worldwide, with MSCI’s All-World small-cap index comprising over 5,600 companies from 47 countries, including firms valued as low as $6.2 million.

Amid these dynamics, artificial intelligence (AI) is emerging as a tool that could transform small-cap investing by efficiently processing large datasets and uncovering investment themes that may not be apparent through traditional analysis. AI’s capacity to sift through thousands of company reports and market signals offers a potential edge in finding undervalued opportunities among these smaller firms, which might be overlooked due to their size and complexity.

The expanding influence of AI in investment comes alongside a broader technology-driven shift in markets, with Japan’s manufacturers playing a pivotal role in global supply chains critical to AI-related hardware and services. This involvement could create new growth opportunities in unexpected segments.

Investment firms have begun to capitalize on this approach. In February, Robeco, a Rotterdam-based asset manager, launched a global small-cap exchange-traded fund (ETF) that combines AI with quantitative investment models to select stocks. The fund has outperformed benchmarks, rising 13 percent compared to 9 percent for MSCI’s All-World index and 3 percent for the global small-cap index. BlackRock is also applying AI, including large language models, to detect nuanced investment themes across small-cap stocks internationally.

While traditional investors may continue to favour the streamlined Topix index for its simplicity and reduced complexity, AI-driven strategies are creating new avenues for investment in the smaller companies removed from the index. This shift marks a notable development in how both market structures and technology intersect to reshape equity investing.

This article was reported by synthesizing coverage from multiple independent news outlets to present a balanced, unbiased account. Read about our editorial standards. Spotted an error? Let us know.