By Risa Maeda
TOKYO, July 21 (Reuters) - A planned change in the Tokyo bourse's main share index next year is expected to make mobile phone giant NTT DoCoMo Inc. less attractive to Japanese institutional investors, prompting short-term players to send the stock to life lows this week, analysts said on Wednesday.
The alteration in the TOPIX's constituent weightings is pressuring DoCoMo shares even more than worries about increasing competition in Japan's crowded telecommunications sector, they said.
The Tokyo Stock Exchange (TSE), Japan's dominant bourse, is expected to announce by the end of July how it plans to change the TOPIX to better reflect the degree to which the index's constituent shares are actually traded.
Taking into account the so-called "investability" of the stock, the weighting of DoCoMo, in which Nippon Telegraph and Telephone Corp. holds a 61 percent stake, is expected to fall to around 1.6 percent from 2.6 percent, analysts said.
Currently, the TOPIX index of all first-section issues reflects each constituent's market value based on the number of outstanding shares. DoCoMo is the second-biggest issue after Toyota Motor Corp. , which has a 4.4 percent weighting.
Unlike the TSE's TOPIX, the Nikkei average , compiled by publisher Nihon Keizai Shimbun Inc, is a simple arithmetic average of the 225 most liquid stocks on the first section.
"What worries me now is how the TSE will change the TOPIX," said Naoyuki Torii, assistant general manager at Fukoku Capital Management. "Pre-event activity has already affected certain shares, such as DoCoMo and Toyota."
Analysts said since the TSE in November first showed an intention to factor in so-called "free floating" criteria into the TOPIX, selling of borrowed stocks has held back DoCoMo and other shares whose weightings would be cut in a float-based index, typically those of subsidiaries of big companies.
"Nervous investors are unloading DoCoMo as speculative funds are active in selling shorts ahead of the TSE's announcement," said Tsuyoshi Segawa, equity strategist at Shinko Securities.
Before gaining on Wednesday, DoCoMo hit a life low of 171,000 yen on Tuesday, down 30 percent this year.
Toyota, which has cut back on traditional ties with its group firms and is expected to see its weighting in a float-based TOPIX increase to around 4.7 percent, has put on 18 percent this year, compared with a nine percent rise in the TOPIX.
DRAFT PLAN
The Tokyo bourse's draft plan for public consultations, unveiled in February, has two options -- changing the TOPIX into a free-float index or developing a new float-adjusted index in addition to the TOPIX.
Since the latter carries the risk of diluting the liquidity of existing TOPIX futures , analysts said, the TSE is expected to choose the former and implement the necessary changes sometime between June and September next year.
Most of the world's other indices have factored in the free-floating criteria. A recent fall in the amount of shares cross-held between Japanese corporations and their creditors and business partners has enabled the TSE to follow suit.
Daiwa Institute of Research chief quants analyst Takaaki Yoshino said Japanese pension funds and other institutions tracking the TOPIX were estimated to total 14 trillion yen ($129 billion), and their portfolio rebalancing would affect a quarter of that value, or almost four days of trading.
"Such passive funds will take action when the weighting changes take effect, probably in September next year," Yoshino said.
"Prior to that, active funds will take advantage of the time lag, and hedge fund activity is likely to come under the spotlight when the TSE announces the results of the public consultations this month."
Analysts said the TSE's announcement could spur a correction in DoCoMo and other issues for which the likely impact from a free-float adjustment had largely been priced in.
But some shares that have yet to be fully recognised as having the potential for a weighting cut, such as Mitsubishi Pharma Corp. , could fall further, they said.
Selling may also hit regional banks, which have outperformed in the past months partly because the TSE's tentative definition of free-floating shares -- issued shares excluding treasury stocks and those held by the top 10 shareholders and senior managers -- benefits the sector most. ($1=108.52 yen)