MSCI Rebalancing Could Pull $10 Billion From Japan: Report

May 3, 2001 ( - The planned component adjustment of Morgan Stanley Capital International's (MSCI) key equity indices may result in a net outflow of over $10 billion from Japan, according to a report from the Daiwa Institute of Research.

The adjustments would come from the adoption of a free-float methodology and boosting target market representation in other markets, as investors adjust holdings that track or use the indices as a benchmark, according to the report. A net total of 1.4 trillion yen ($11.47 billion) could be withdrawn.

Transition Schedule

The changes in methodology were announced in December (MSCI Changes Index Methodologies – ). MSCI has said it would unveil index constituents and their weightings based on the new method on May 19.

At the end of April, market capitalization of Japanese stocks included in the key MSCI indices totaled 244 trillion yen, according to Daiwa Institute of Research estimates. Of that total, holdings by funds either passively tracking the indices or mostly following them could account for as much as five percent or 12 trillion yen, according to Reuters.

When MSCI implements the changes in two phases at the end of November and on May 31 next year, about 11.5% of the funds could flow out of Japan because of limited “tradability” in Japanese shares, according to a Daiwa Institute analyst.

Hardest hit could be parents of companies with outstanding market capitalization or those with shares largely held by related corporations and creditor banks. Stocks likely to benefit are those with large market capitalization currently excluded from MSCI’s closely watched indices.