The Power of Investor Pushback And Regulatory Change. Case Study: Japan

Cathy Brand 20 October 2023


Examining the Japanese market, the author of this article looks at how to answer clients when they ask why fund marketing regulations are so complex, vague and often overly restrictive?

The author of this article is Cathy Brand, CEO Sales Road Maps Online Ltd® – someone who has written in these pages before about compliance and strategy in the financial world. The usual editorial disclaimers apply to views of guest contributors. Jump into the conversation! Email


Cathy Brand

Global Sales Compliance has been tracking the evolutionary development of country fund marketing regulations in 60-plus jurisdictions for more than two decades.  

When we advise clients on marketing their funds in numerous jurisdictions, clients frequently ask: “Why”? “Why are fund marketing regulations in a specific jurisdiction so strict/overly complex and/or so vague/grey?” 

Clients ask the “Why Question” to understand why it can be easy for them to comply with fund marketing regulations in some countries but so difficult in others.  

Is the past prologue? 
To understand a country’s current fund marketing regulatory regime, it’s always helpful to understand that country’s historic regulatory regime.

Everyone is familiar with the quote from “The Tempest” by William Shakespeare: “What is past is prologue.”  This phrase refers to the influence that history has on understanding and contributing to context shaping current events. 

When you understand the economic history and cultural influences on the evolutionary development of a country’s fund marketing regulations, you have the context to understand that country’s regulations today.  

One of the countries we have analysed with the most interesting regulatory development is Japan.  

In this blog, we explore how Japan’s regulations for marketing funds in various structures have evolved over the past two decades, to create contextual understanding of the country’s current regulatory regime.  

Importantly, we explore “the power of investor pushback” in the Japan Case Study: how Japan’s powerful pension fund feedback (and pushback) to Japan’s Financial Services Authority has impacted the country’s current fund marketing regime.  

Have country fund marketing regulations evolved over time?  
Yes. Country fund marketing regulations are different from each other and each country’s fund regulations have evolved at their own individual pace, based on their respective economic and cultural factors. 

There is some quasi-standardisation of country fund marketing regulations at EU/EEA level, but each country’s regulations – as implemented locally – are not the same due to “top-up” (gold plating) regulations when implementing EU directives locally.

How have Japan’s fund marketing regulations evolved over time? 
Japan’s financial products and services regulations have undergone dramatic evolutionary development in the last 2+ decades. In the late 90s, foreign financial services industry commentary was:

“Japan’s fund marketing and licensing rules are so unclear. How can we comply with Japan’s fund marketing and licensing regulations when we can’t understand them?”  

When Japanese-English translation issues surfaced, the challenge for foreign (Western) fund managers to understand Japan’s rules increased. 

Japan’s economic boom and foreign firm response
In the late 90s, confidence in Japan was high: the Japanese government launched its "Big Bang" economic reforms. As a result, there was an increased trend towards non-Japanese (Western) financial institutions who wanted to do business with investors in Japan, a quite lucrative opportunity.  

By the early 2000s, Japan’s economic recovery had created new millionaires, wealthy Baby Boomers preparing to retire, and foreign firms rushed into Japan (again) to try to crack this difficult but lucrative market. Foreign fund managers, brokers and banks targeted Japanese investors to take advantage of the environment created by the Big Bang, a key economic trigger to Japan’s business development. Japan was, in effect, “open for business.” 

Japan’s economic boom and Japan FSA response
Japan’s economy was booming … but Japan’s regulations (especially its fund private placement and licensing regimes) were still under development compared with Western regulatory regimes. 

Japan FSA realised it had to act.  

The increased business activity by foreign fund managers wanting to conduct business in Japan and with Japan investors rose to a threshold level of capturing Japan FSA’s attention. 

During that time, our GSC Japan Counsel confirmed that Japan FSA proactively undertook a hiring spree for bilingual Japanese-English lawyers from leading, world-renowned US/UK law schools. It recruited these lawyers under lucrative employment contracts to relocate to Japan and work for Japan FSA.  

Similarly, Japan FSA started cracking down on breaches of its financial services regulations by foreign institutions. Several foreign financial institutions were found to be in breach of Japan’s securities and licensing regulatory regime and were expelled from the country.  

For example, the expulsion of Citigroup Private Bank from Japan in 2004 (and earlier 1999 sanctions against other Citi affiliates resulting in Citigroup affiliate franchise losses) was the most dramatic of a string of failures among foreign firms that have too often misread the attitudes of Japanese investors and regulators.   

Powerful investor segment: Japan’s pension funds 
According to a 2018 survey by a leading global consultant of foreign investment by pension funds around the world, Japanese retirement assets at that time totalled ¥182 trillion ($1.2 trillion), making Japan’s pension industry one of the largest pension fund markets in the world.  

Japan’s pension funds face several challenges, including servicing the world’s oldest population, low interest rates and sustainability issues. Its pension funds need to diversify its investments in alpha generating opportunities, as the timeline for Japan Pension Funds’ Projected Benefits Obligation (PBO), or the total amount that a pension fund expects to pay to meet its future pension obligations benefits to retirees, is increasingly shorter and shorter.  

Japan’s government cannot afford to not protect its valued pension funds.  

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