The immediate effect comes at Thursday’s close, when around $60 billion of passive trades is expected to cause sharp, short-lived price swings and heavy volume in affected stocks. That can briefly distort the Topix and individual names, which is why hedge funds have been positioning in advance. Over time, the quarterly weight cuts create steady selling pressure on smaller, less liquid companies and support larger stocks such as Kioxia. That may widen the gap between Japanese large caps and small caps. The 2027 re-evaluation gives companies a reason to improve liquidity and free float, which could encourage more unwinding of cross-shareholdings and buybacks. That fits the governance push foreign investors have rewarded. Watch for a temporary gap between the Topix and the Nikkei 225, which isn’t affected.---Japan is turning its sprawling Topix into a leaner, more investable benchmark, and with about ¥166 trillion tracking it, the reshuffle starts with a $60 billion trade on Thursday and keeps going for two years.Summary:The Topix’s largest-ever overhaul takes effect on October 30, with about $60 billion of passive trading expected at Thursday’s close, the Japan Times reported.683 companies that failed new liquidity and free-float tests will be phased out, with their weights cut in eight quarterly steps from January 2027 to zero in October 2028.Companies that meet the criteria at an October 2027 re-evaluation stop being cut and remain in the index.The index is projected to shrink from 1,669 members after October to about 986 by mid-2028.About ¥166 trillion of passive assets track the Topix, per Daiwa, so index funds must sell dropped stocks and buy additions.Kioxia’s weighting is set to rise, with hopes of around $13 billion of inflows, Bloomberg reported.Japan’s main equity benchmark is undergoing the biggest overhaul in its history this week, with changes to the Topix index taking effect from Friday, October 30. Around $60 billion of passive trading is expected at Thursday’s close as index funds reposition, according to the Japan Times, and the reshuffle will continue to shape flows into Japanese stocks for the next two years.The Topix, short for Tokyo Stock Price Index, has long been one of the broadest major equity benchmarks, covering a large share of companies listed on the Tokyo Stock Exchange. That breadth has drawn criticism, because it includes many small, thinly traded companies that are hard for large investors to buy. The Japan Exchange Group has been reforming the index to make it more investable, cutting the number of constituents from around 2,200 to around 1,700 in a first phase that ended in January 2025.The second phase is far more ambitious. Under the periodic review published on October 7, stocks are now judged on annual trading value and on the market value of shares freely available to investors. Some 683 companies that failed to meet those tests will be phased out, while dozens of others have been added. Exchange data show the index had 1,636 members at the end of August and 1,669 after October’s changes, but the count is projected to fall to 986 once the transition is complete in mid-2028, plus any companies that requalify.The phase-out is gradual by design. Rather than removing the 683 stocks at once, the exchange will cut their index weight in eight quarterly steps of 12.5 percentage points, starting in January 2027 and reaching zero in October 2028. Companies that meet the criteria at a re-evaluation in October 2027 will stop being cut and remain in the index. From October 2028, the Topix will be rebalanced annually.The stakes are large because so much money tracks the index. Daiwa Securities estimates around ¥166 trillion of passive assets follow the Topix, including index funds and exchange-traded funds. When a stock’s weight is cut, those funds must sell it, and when a stock is added or up-weighted, they must buy, regardless of valuation. That mechanical demand is why hedge funds have been positioning ahead of the changes, the Japan Times reported, aiming to profit from price moves in affected stocks around the rebalancing.Some well-known names stand to benefit. Memory chipmaker Kioxia is set to see its weighting rise, with hopes of around $13 billion of inflows, Bloomberg reported earlier this month. For the companies being phased out, the gradual schedule gives them time to lift trading liquidity or free float, through measures such as unwinding cross-shareholdings, in order to requalify.Analysts see the reform as part of Tokyo’s wider push to improve corporate governance and valuations. Some argue that concentrating the benchmark in larger, more liquid companies could lift the market’s overall valuation and reinforce the long-running tilt toward large caps, while smaller companies dropped from the index could face weaker demand from passive investors.For investors, the immediate focus is Thursday’s close, when the first rebalancing trades are expected. The longer-term effect will play out every quarter until 2028, making the overhaul a slow-moving but persistent force on Japanese equity flows. This article was written by Eamonn Sheridan at investinglive.com.