The Topix index is undergoing its largest-ever overhaul, with hundreds of Japanese stocks set to be removed.

Japan Exchange Group will announce the largest-ever overhaul of the Topix index on Wednesday, a adjustment that will shrink the number of constituents in Asia's broadest major equity gauge and push Japanese companies to boost their own market appeal. The revamp is the second phase of a multiyear reform program by the operator of the Tokyo Stock Exchange aimed at improving the Topix's investability. The index has long been unusual among major global benchmarks for its sheer number of constituents, including hundreds of illiquid small-cap stocks. Daiwa Securities and SMBC Nikko Securities estimate that under stricter inclusion criteria, about 680 companies could be removed from the index, while roughly 35 new stocks are expected to be added, including Japan McDonald's Holdings and Ferrotec. The reform has far-reaching implications for global investors. Junichi Hashimoto, chief quantitative analyst at Daiwa Securities, estimated in September that about 166 trillion in passive assets track the Topix. Stocks removed from the index will face passive selling pressure from index funds; those added will receive steady buying from passive funds and also come onto the radar of active fund managers, helping funds outperform the index.