Japan's Topix stock index is poised for its biggest overhaul, with more than 600 companies — over a third of its constituents — likely to be gradually removed under new eligibility rules, according to analysts' estimates.

The changes, aimed at improving liquidity and corporate governance, will disproportionately impact small-cap stocks. Analysts expect the index to shed roughly 38% of its current members as firms fail to meet stricter requirements for trading volume and market capitalization.

Companies facing exclusion include Musashi Financial Group and Dentsu Holdings, among others struggling to meet the new thresholds. The restructuring reflects broader efforts by Japanese policymakers to revitalize the market and attract foreign investment.

Market participants are bracing for increased volatility as index-tracking funds adjust their portfolios. Smaller firms may face heightened pressure to consolidate or seek alternative listings to maintain visibility and investor interest.