Have April 2000 Changes in Japanese Tax Law Been Effective?

Abstract

The Japanese mutual fund industry has provided systematic negative risk adjusted returns over the past three decades. It has been suggested that this underperformance may be attributed to antiquated tax regulation. The Japanese government enacted new tax laws in April 2000. This, along with other reforms around that time, led to huge cash inflows and consequential structural changes in the Japanese mutual fund industry. In this work we use a new technology, known as the gap statistic, to validate that the number of Japanese mutual fund styles was eight prior to the change in tax laws. A previous study suggests that five styles were appropriate after the changes in tax law. Hence, we infer that the changes in tax law caused a decline in the number styles, from eight to five, eliminating old, tax dependent mutual fund investment styles.