* Sony seen out; Otsuka Holdings, Seiko Epson to be included in JPX400
* JPX400 outperforming Nikkei, Topix since April
* Index putting pressure on companies to raise return on equity
* Japanese companies seen boosting share buybacks, dividend payouts
* Investors still sceptic whether JPX400 will become main benchmark
By Hideyuki Sano
TOKYO, June 13 (Reuters) - Sony Corp and more than 20 other companies will likely be kicked out of Japan's new stock index, which was set up to comprise investor-friendly companies, when the index undergoes its first annual review in August.
Otsuka Holdings, Seiko Epson and Daiwa Securities Group will likely replace them in the index in a system of reward and punishment designed to encourage Japanese companies to take shareholder value more seriously.
Market players said the JPX-Nikkei Index 400, introduced in January, was having some success in goading companies to boost returns to shareholders.
"The impact of the JPX400 seems to be bigger than I had expected. Some of the companies that are not included in the index are concerned why they aren't in there," said Masaki Uchida, executive director at JPMorgan Asset Management.
Indeed, two companies in the bellwether Nikkei average but not in the JPX400 have announced plans to boost shareholders' returns.
Amada Co Ltd more than tripled its dividend and said it would seek a payout ratio of 50 percent in future, while Fujikura Ltd announced a share buyback. They booked share price gains of 30 precent and 12 percent, respectively, for their efforts.
"It's becoming common for companies to buy back stock not because share prices are cheap but rather because they want to raise efficiency of capital," said Kengo Nishiyama, senior strategist at Nomura Securities.
Nishiyama estimated returns to shareholders via dividends and share buybacks would rise to rise to 11.4 trillion yen ($112 billion) in the financial year to March, up from 10.3 trillion yen last financial year and near the 12.3 trillion yen record in 2007/08.
Japanese companies have famously poor returns on equity (ROE) -- a gauge of how efficiently a company uses its capital, obtained by dividing net profits by shareholders' equity.
On average, they produce net profits of 9 cents on each dollar of shareholders' equity, compared with 13.9 cents in the United States, according to Thomson Reuters Starmine data.
Japan Exchange Group and Nikkei, which compile the index, select component companies by measuring ROE, operating profits and market capitalisation, with weightings of 40, 40 and 20 percent in that order.
There are also qualitative measures on corporate governance, such as whether a company has outside board members, but these have a minor impact, with only up to 10 components affected.
Prime Minister Shinzo Abe has pushed for the new index in the hope that it will make Japanese shares more attactive and and help stimulate the economy.
Government Pension Investment Fund (GPIF), the world's largest pension fund with assets of $1.26 trillion, adopted the JPX400 as benchmark for a part of its domestic stock portfolio.
That has helped the JPX400 outperform the Nikkei average, and the broader Topix. So far this quarter, the JPX has advanced around 3.4 percent, compared to the Topix's 2.9 percent gain and the Nikkei's 1.0 percent rise.
As the government beats the drum for the JPX400, more than 20 investment trust funds, or toushin, that track JPX400, have been sold to retail investors, managing about 100 billion yen of funds in total.
Still, there is scepticism over whether the JPX400 will replace the Nikkei, or the Topix, to become a benchmark.
One concern is the index's clear-cut rules on how it chooses its components, which makes it easy for speculators to front-run the annual August changeovers.
"This means passive investors who track the JPX400 will be a sucker. They will likely end up buying (newly added shares) at high prices and selling (those that drop out from the index) at low prices," said a fund manager at a Japanese asset management firm.
Indeed, analysts at Nomura, Daiwa and SMBC Nikko came up with almost identical lists of likely new entrants and leavers.
For a full list of companies that are likely to join or leave the index in the upcoming reshuffle, see
$1 = 102.31 yen Additional reporting by Ritsuko Ando; Editing by Kim Coghill