Japan: Financial Sector Assessment Program-Technical Note on Regulation and Supervision of Investment Funds

This technical note reviews the functioning and effectiveness of the regulation, supervision, and systemic risk monitoring of investment funds in Japan. It focuses on the requirements that are directly relevant to maintaining financial stability, namely, valuation, segregation and safekeeping of fund assets, liquidity risk management and redemption of fund units. Investment Management Business Operators that are part of major financial groups dominate the industry and the majority of assets under management are invested in equities via securities investment trusts. The regulatory framework has been recently enhanced with relation to liquidity risk management. The authorities have also recently implemented a new supervisory approach that relies on an enhanced offsite monitoring of firms. The Financial Services Agency (FSA) has increased its data collection efforts and launched a number of targeted initiatives to get a better insight of the industry, in particular in relation to certain practices that the FSA determines require more attention, such as liquidity risk management. Authorities should ensure a broader coverage of their onsite inspection program while maintaining their offsite enhancement focus.