TOKYO (March 13): The Tokyo Stock Exchange launched a new stock index on Monday, selecting 200 companies among small-to-mid-cap firms with high return on equity and operating profits as well as strong corporate governance.

JPX-Nikkei Mid- and Small-Cap Index is modelled on a similar index for larger shares with high profitability, the JPX-Nikkei Index 400, which debuted three years ago to help put pressure on company management to boost profitability.

"The launch of this index is expected to continue to encourage Japan corporations to emphasize actions that are valued by equity shareholders," Kabir Goyal, associate portfolio manager at Wasatch Advisors in Salt Lake City, said.

The launch comes as Japanese small-cap shares outperform their larger peers. Investors have recently avoided large-cap shares, which are highly sensitive to the yen and by extension susceptible to any irregular comments or tweets from US President Donald Trump.

Nikkei Jasdaq index, Japan's largest market for start-ups, had a 21-day winning day streak until Friday, the longest since early 2004.

So far this year, it has gained 11%, while the index of another start-up market, Mothers, has jumped 14%.

The Tokyo Stock Exchange's Second Section, mostly composed of mid- and small-cap shares, has surged 12%, compared to 2.7% gains in the Nikkei and a 3.9% increase in the Topix, which covers all shares on the TSE's main board.

"Japan small caps are fertile ground for stock pickers and an area where we've been able to generate significant alpha for our portfolios," said Goyal of Wasatch Advisors.

While Goyal invests also in the TSE's main board, he also has shares in En-Japan Inc, a net-based employment agency that is included in the new index, and other Jasdaq shares.

According to the exchange, an average ROE in the past three years of the 200 firms included in the new index stood at 18.2%, much higher than 12.5% for the JPX-Nikkei 400 and 8.2% for the Topix.

But some fund managers also say trading volume for small caps has been subdued lately despite their rally, suggesting limited investor interest.

"Japanese small caps tend to follow large-cap stocks' moves, so they rise after large caps rise but they fall fast when there is a macro event," said Ryosuke Matsui, portfolio manager at FIL Investments in Japan.

"Small caps are like flowers blooming for a very short period of time."