Impact of a New Regulatory Policy on Thematic and Monthly Distribution Funds in Japan

Abstract

The Japan Financial Services Agency (JFSA), the country’s financial regulatory body, is concerned with business conduct surrounding mutual fund sales in Japan, especially regarding thematic and monthly distribution funds. The agency introduced a new regulatory policy in 2015 to encourage competition to provide high-quality, customer-oriented financial products and services. Unlike traditional regulation, this policy is based on the comply-or-explain approach, which does not mandate compliance. We utilize a difference-in-differences (DID) approach to examine whether this policy induces changes in the behavior of fund distributors regarding the promotion of these funds. We find that the effectiveness of the policy is not uniform. The policy has a limited impact on reducing fund flows and the size of thematic and monthly distribution funds among active funds, which include equity, bond, and balanced funds. By contrast, we find some evidence that the policy has reduced the fund flows and the size of equity thematic and monthly distribution funds relative to low-cost equity index funds. We find that the comply-or-explain approach alone may not suffice to regulate these fund sales, as distributors and managers can pursue their own interests. In addition, the effectiveness of the approach also depends on investors’ behavior, which may be hindered by a lack of sophistication in understanding the characteristics of these funds.