Investment Funds 2020

Last Updated November 26, 2019

Japan

Law and Practice

Authors



Mori Hamada & Matsumoto is one of the largest full-service Tokyo-headquartered international law firms. A significant proportion of its work is international in nature, representing clients in cross-border transactions, litigation and other dispute resolution proceedings. MHM has more than 480 lawyers and other professionals, and more than 460 support staff. The firm’s senior lawyers include highly respected practitioners and leaders in the Japanese and international legal community, including prominent law professors at the University of Tokyo and a former Prosecutor-General of the Public Prosecutors Office. MHM is highly recognised by clients and legal professionals in the following practice areas: M&A, joint ventures, finance, international capital markets, asset management, loans and securitisations, private equity, infrastructure/energy, PFI/PPP, insolvency/restructuring, IP, antitrust and competition. Other core practice areas include tax and labour law. MHM has a strong presence in Asia, with offices in Beijing, Shanghai, Singapore, Yangon, Bangkok, Ho Chi Minh City and Jakarta (AKSET Law MHM Jakarta Desk). MHM also has domestic offices in Fukuoka, Osaka and Nagoya.

In Japan, investment funds are one of the most popular financial instruments for investors. Not only institutional investors but also retail investors make investments in various funds.

Under the Financial Instruments and Exchange Law (FIEL), units/shares of investment funds may be offered by way of public offering or private placement. In a private placement, an issuer may be exempted from certain disclosure requirements that apply to public offerings.

There are basically two different types of private placement exemption: Private Placement to a Small Number of Persons; and Private Placement to Qualified Institutional Investors.

In general, a Private Placement to a Small Number of Persons focuses on the number of offerees, while a Private Placement to Qualified Institutional Investors focuses on the offerees’ qualification.

There is no difference between the laws and regulations that apply to retail investment funds and alternative investment funds in general. In addition, as the Japanese laws and regulations do not have a specific concept of alternative investment funds, there are no regulations that apply specifically to alternative funds.

According to the laws of Japan, investment funds are generally divided into three different categories: investment trust; investment company; and limited partnership. The investment trust (sometimes referred to as a contractual type investment fund) is one of the most popular investment funds for Japanese investors. In fact, numerous investment trusts are established in Japan every year, and units of these investment trusts are actively offered/sold to Japanese investors by securities companies and banks.

It should be noted that not only investment funds established in Japan but also investment funds established outside Japan (such as an FCP in Luxembourg or a unit trust in the Cayman Islands) are offered to investors in Japan, and a significant amount of money is invested into those foreign investment funds from Japan.

Under the laws of Japan, an investment trust (a contractual type investment fund) is formed by way of a two-party deed between a manager and a trustee. An investment company (a corporate type investment fund) is established by a memorandum and articles of incorporation. A limited partnership (a partnership type investment fund) is established by executing a limited partnership agreement.

Under the laws of Japan, unitholders of investment trusts, shareholders of investment companies, and limited partners of limited partnerships all benefit from limited liability, so the maximum loss should not be greater than their investment capital.

Under the FIEL, it is unlawful to make a public offering of securities unless an issuer of the securities has filed a securities registration statement (SRS) with the authorities. The FIEL and a cabinet order and cabinet office regulations thereunder (collectively, the “Cabinet Order”) specify matters that need to be described in the SRS, including an investment objective, risk factors, subscription/repurchase procedures and a valuation method. Once filed, the SRS is to be disclosed to the public through the Internet. In a public offering, an issuer also needs to prepare a prospectus in addition to the SRS filing requirements.

Under the FIEL, there is an exemption to the SRS/prospectus requirements: a private placement. If the requirements for the private placement exemption are met, an issuer is not required to file the SRS and prepare the prospectus.

In addition to a filing requirement under the FIEL, the Investment Trust and Investment Corporation Law (ITICL) also requires an issuer of an investment trust/company to file a registration statement concerning an investment trust/company (“FSA Registration Statement”) with the authority (the Financial Services Agency of Japan – FSA). Unlike the SRS to be filed under the FIEL, the FSA Registration Statement needs to be submitted not only for a public offering but also for a private placement.

In contrast to the SRS, the FSA Registration Statement is not publicly disclosed.

While there is no category of funds classified as alternative funds, investment funds that use alternative investment strategies such as an arbitrage investment strategy or managed futures are generally for sophisticated investors, with some exceptions.

In Japan, an investment trust established by way of a two-party deed between a manager and a trustee is quite popular. There are many investment trusts with various ranges of investment objectives in Japan. For instance, some funds focus on Japanese equities, while other funds focus on global bonds.

In Japan, an investment company (sometimes referred to as a corporate type investment fund) is mainly used in the context of REITs. In other words, an investment company established in Japan is not generally utilised for the purpose of investment into securities (such as equities or bonds). However, it is also true that some securities firms actively offer various types of SICAVs established in Luxembourg to Japanese retail investors.

A limited partnership (sometimes referred to as a partnership type investment fund) is mainly utilised for the purpose of private equity investments. This type of investment fund is not so common for Japanese retail investors, and most investors are institutional. As with other types of investment funds, not only Japanese domestic funds but also limited partnerships established outside Japan are offered in Japan.

As described above, there are basically two different types of private placement exemption: a Private Placement to a Small Number of Persons; and a Private Placement to Qualified Institutional Investors. Under the latter, only qualified institutional investors are allowed to invest in the fund.

Japanese regulations on asset management vary depending on whether an asset manager has been delegated discretionary authority to manage a client’s assets on the client’s behalf, or whether the asset manager is simply able to provide investment advice. The provision of asset management services in Japan requires registration with the FSA, regardless of whether or not an asset manager has discretion to manage a client’s assets on the client’s behalf.

A non-discretionary advisory business is one that provides advice on the value of securities or investment decisions based on the value of financial instruments in return for fees.

Providing advice on the value of securities or investment decisions based on the value of financial instruments through newspapers, magazines or books available to the public will not fall under the scope of a non-discretionary advisory business. However, the provision of advice through a website requiring readers to register as members to pay fees where that advice is not otherwise publicly available is likely to fall under the scope of a non-discretionary advisory business.

Registration of a non-discretionary advisory business is normally required under the FIEL for any person wishing to operate a non-discretionary advisory business in relation to securities or derivatives (an "investment advisory business"). Any individual or corporation may register to perform investment advisory business once it has met the various requirements for qualification. These include the satisfaction of certain registration requirements – for example, having appropriate compliance systems in place for an investment advisory business. Registration further requires an investment adviser to comply with certain conduct rules, including a restriction on providing advice to customers that is designed to encourage entry into transactions that would harm their interests while promoting another customer’s interests.

Successful registration of an investment advisory business also gives rise to a number of administrative obligations, such as the preparation of business reports for each business year, and the submission of those reports to the FSA. The investment adviser will also be required to prepare and maintain books and documents in relation to the investment advisory business.

Discretionary investment management business is divided into the following four subcategories:

  • investment management business managing the assets of an investment company established under the ITICL by investing in securities or derivatives under an asset management contract with an investment company (investment company asset management services);
  • investment management business managing the assets of an investor by investing in securities or derivatives under a discretionary investment management contract (discretionary investment management services);
  • investment management business managing the assets of an investment trust under the ITICL (including foreign investment trusts) by investing in securities or derivatives, and acting as a settlor of such investment trust (investment trust management services); and
  • investment management business managing the assets of a collective investment scheme, which is generally a partnership (not including corporate type collective investment schemes) such as a partnership under the Civil Code of Japan, a silent partnership under the Commercial Code of Japan, an investment business limited partnership under the Investment Business Limited Partnership Act of Japan, a limited liability partnership under the Limited Liability Partnership Act of Japan, or any similar foreign entity, as a general partner of such collective investment scheme by investing predominantly in securities or derivatives (collective investment scheme management services).

With regards to the first and second subcategories, if the managed assets include real property, the investment manager will need to have a real property transaction licence under the Land and Building Transaction Act of Japan (LBTA). If the assets managed are predominantly invested in real property, the investment manager is required to have transaction discretionary representation approval under the LBTA. In addition, the management of the assets of an investment company (the first subcategory) or an investment trust (the third subcategory) by investing in real property falls under the definition of Specified Investment Management Activities and requires approval from the FSA under the ITICL. Almost all listed Japan real estate investment trusts (J-REITs) are classified under the first subcategory (investment company) rather than the third (investment trust).

With respect to the second subcategory listed above, if the managed assets are invested in the beneficiary interests of a trust whose underlying assets are real property, such management is referred to as real property-related specified investment management and requires registration as a general real property investment adviser under the Real Property Investment Advisory Rules governed by the Ministry of Land, Infrastructure, Transport and Tourism of Japan (MLIT) as a prerequisite to the registration of the discretionary investment management services.

In a wrap account or separately managed account (an SMA), assets deposited in the SMA are managed by investing in shares, bonds or other financial instruments in accordance with the investment policy agreed from the outset. As the operators of SMAs are delegated the trading authority to manage the account by investing in securities, their services are classified as discretionary investment management, and the operator must be registered to provide discretionary investment management services.

To be registered as a discretionary investment manager, a person must meet a number of requirements, including the entity requirement. Under this restriction, only a joint-stock corporation incorporated under the Corporation Act of Japan and having a board of directors and a corporate auditor or a committee, or a foreign company that is similarly organised and has a business office in Japan, is eligible to register as a discretionary investment manager. The prospective discretionary manager must also meet the minimum capital amount and net worth requirements (in each case, JPY50 million or more), and certain compliance system requirements, such as having a personnel structure that is appropriate to engage in discretionary investment management.

In contrast to the requirements of an investment advisory business, the requirements for registration as a discretionary investment manager are significantly more onerous. Like a non-discretionary investment manager, a registered discretionary investment manager is subject to certain codes of conduct, and is, for example, restricted from implementing investments that lead to transactions with itself, or to transactions involving any other assets managed by it. It is also required to prepare and maintain books and documents in relation to its investment management business, and to prepare yearly business reports for submission to the FSA. A registered discretionary investment manager providing investment company asset management services or investment trust management services is also subject to certain additional obligations under the ITICL, such as a duty to procure a third-party appraiser to investigate the asset value when investing in real property.

A registered discretionary investment manager is, in principle, prohibited from engaging in any businesses other than financial instruments transactions, in order to insulate the discretionary investment management business from risks unrelated to financial instruments transactions. That said, a registered discretionary investment manager is permitted to engage in certain businesses that are ancillary to financial instruments transactions, such as M&A advisory and business consulting. On making further filings with the regulator, a registered discretionary investment manager will be permitted to engage in certain other businesses, such as commodities-related business, money lending and real property brokerage.

Non-local service providers, including administrators, custodians, director services providers, etc, are not subject to regulation/registration requirements in Japan.

No regulatory requirements apply to non-local managers of retail funds in Japan.

As described previously, under the laws of Japan, in order to market investment funds, an issuer must make filings for the relevant fund. Also, a person who conducts such marketing must hold a proper licence. However, other than those filing/licence requirements, no regulatory approval is required in order to conduct the marketing of investment funds.

There are no specific regulations that apply to alternative funds.

There are no specific regulations that apply to alternative funds.

The FIEL requires a financial instruments business operator to conduct its business in such a manner that the state of its business operations does not fall under one of the following items:

  • its issuance of a solicitation in connection with an act that constitutes a financial instruments transaction which is found to be inappropriate in light of customer knowledge, customer experience, the state of customer assets, or the purpose for which a Financial Instruments Transaction Contract is concluded, results in or is likely to result in insufficient investor protection; and
  • beyond what is set forth in the preceding item, the state of business operations is such that the financial instruments business operator is found not to have taken measures to ensure the appropriate handling of customer information it has obtained in the course of the business, or business operations are otherwise in a state specified by Cabinet Office Order as being contrary to the public interest or likely to compromise the protection of investors.

There are no rules, however, that specify certain classes of investors as being inappropriate to invest in certain types of funds.

In general, the Financial Services Agency is open to discuss regulatory questions, and regularly publishes guidance on regulatory matters, although it is generally reluctant to give exact timeframes or definite replies on hypothetical questions.

There are no specific regulations that apply to alternative funds.

Under the rules of the Japan Investment Trust Association (JITA), investment funds in Japan are not permitted to access fund finance for leverage.

Under the rules of the JITA, Japanese investment trusts are permitted to make borrowing only when it is necessary for the purpose of the payment of redemption money or for the purpose of the payment of distributions.

Finance necessary for redemption money or distribution is normally made through borrowing from banks. Borrowing can be secured by bonds or shares invested by the fund, but it is not, in practice, usually secured.

Investment Trusts

Under the Corporation Tax Act, Collective Investment Trusts are treated as tax-exempt trusts.

The following investment trusts are categorised as Collective Investment Trusts under the Corporation Tax Act:

  • Securities Investment Trusts (regardless of publicly offered or privately placed);
  • investment trusts publicly offered in Japan; and
  • Foreign Investment Trusts.

In this article, we will mainly discuss Securities Investment Trusts and Foreign Investment Trusts, which are popular among Japanese investors.

Collective Investment Trusts are not treated as pass-through entities, but they are tax-exempt, so are not taxed in respect of capital gains and incomes paid to them. Investors in a Collective Investment Trust are subject to the relevant withholding taxes in respect of profit distribution.

Investment Companies

Taxation is imposed on investment companies at the fund level. However, if certain conditions are fulfilled (eg, more than 90% of distributable profits must be distributed to investors), dividends paid to investors may be deducted for Japanese corporation tax purposes. Investors in investment companies are subject to the relevant withholding taxes in respect of profit distribution.

Limited Partnership

Limited partnerships are pass-through entities for Japanese tax purposes, with taxes being levied on the investors in the fund rather than on the fund itself. Non-resident investors (both individuals and corporates) are subject to relevant withholding taxes in respect of profit distribution, whereas resident investors are not subject to withholding taxes.

In Japan, investment funds are one of the most popular financial instruments for investors. Not only institutional investors but also retail investors make investments in various funds.

According to the laws of Japan, investment funds are generally divided into three different categories: investment trust; investment company; and limited partnership. The investment trust (sometimes referred to as a contractual type investment fund) is one of the most popular investment funds for Japanese investors. In fact, numerous investment trusts are established in Japan every year, and units of these investment trusts are actively offered/sold to Japanese investors by securities companies and banks.

It should be noted that not only investment funds established in Japan but also investment funds established outside Japan (such as an FCP in Luxembourg or a unit trust in the Cayman Islands) are offered to investors in Japan, and a significant amount of money is invested into those foreign investment funds from Japan.

Under the laws of Japan, an investment trust (a contractual type investment fund) is formed by way of a two-party deed between a manager and a trustee. An investment company (a corporate type investment fund) is established by a memorandum and articles of incorporation. A limited partnership (a partnership type investment fund) is established by executing a limited partnership agreement.

Under the laws of Japan, unitholders of investment trusts, shareholders of investment companies, and limited partners of limited partnerships all benefit from limited liability, so the maximum loss should not be greater than their investment capital.

Under the FIEL, it is unlawful to make a public offering of securities unless an issuer of the securities has filed a securities registration statement (SRS) with the authorities. The FIEL and a cabinet order and cabinet office regulations thereunder (collectively, the “Cabinet Order”) specify matters that need to be described in the SRS, including an investment objective, risk factors, subscription/repurchase procedures and a valuation method. Once filed, the SRS is to be disclosed to the public through the Internet. In a public offering, an issuer also needs to prepare a prospectus in addition to the SRS filing requirements.

Under the FIEL, there is an exemption to the SRS/prospectus requirements: a private placement. If the requirements for the private placement exemption are met, an issuer is not required to file the SRS and prepare the prospectus.

There are basically two different types of private placement exemption: Private Placement to a Small Number of Persons; and Private Placement to Qualified Institutional Investors.

In general, a Private Placement to a Small Number of Persons focuses on the number of offerees, while a Private Placement to Qualified Institutional Investors focuses on the offerees’ qualification.

In addition to a filing requirement under the FIEL, the ITICL also requires an issuer of an investment trust/company to file a registration statement concerning an investment trust/company (“FSA Registration Statement”) with the authority (the Financial Services Agency of Japan – FSA). Unlike the SRS to be filed under the FIEL, the FSA Registration Statement needs to be submitted not only for a public offering but also for a private placement.

In contrast to the SRS, the FSA Registration Statement is not publicly disclosed.

In Japan, investment funds (particularly investment trust) are one of the most popular financial instruments for investors. Many securities companies and banks sell various types of investment trusts to retail investors. In addition to these retail investors, institutional investors also actively make investments into investment funds.

In Japan, an investment trust established by way of a two-party deed between a manager and a trustee is quite popular. There are many investment trusts with various ranges of investment objectives in Japan. For instance, some funds focus on Japanese equities, while other funds focus on global bonds.

In Japan, an investment company (sometimes referred to as a corporate type investment fund) is mainly used in the context of REITs. In other words, an investment company established in Japan is not generally utilised for the purpose of investment into securities (such as equities or bonds). However, it is also true that some securities firms actively offer various types of SICAVs established in Luxembourg to Japanese retail investors.

A limited partnership (sometimes referred to as a partnership type investment fund) is mainly utilised for the purpose of private equity investments. This type of investment fund is not so common for Japanese retail investors, and most investors are institutional. As with other types of investment funds, not only Japanese domestic funds but also limited partnerships established outside Japan are offered in Japan.

There is no specific restriction in Japan on the types of investors that can invest in a retail fund.

In addition to the disclosure requirements to investors with respect to investment funds, licence requirements should also be noted.

Under the laws of Japan, it is unlawful for any person to provide investment management services unless such person holds an investment management licence, in principle. It is also unlawful for any person to offer a security unless such person holds the Type I/II licence, in principle.

Thus, a manager of an investment trust/company and a general partner of a limited partnership needs to hold the investment management licence, in principle. Also, distributors who offer a unit/share of an investment trust/company need to hold the Type I licence, and distributors who conduct a solicitation of limited partnership interests need to hold the Type II licence.

Non-local service providers, including administrators, custodians, director services providers, etc, are not subject to regulation/registration requirements in Japan.

No regulatory requirements apply to non-local managers of retail funds in Japan.

As described previously, under the laws of Japan, in order to market investment funds, an issuer must make filings for the relevant fund. Also, a person who conducts such marketing must hold a proper licence. However, other than those filing/licence requirements, no regulatory approval is required in order to conduct the marketing of investment funds.

Theoretically speaking, the filing of an SRS/FSA Registration Statement is only required if an offer is made. Generally, an offer of a security is construed as a solicitation of an application to acquire newly issued securities. While there is no clear and specific definition of “solicitation” of a security, it is generally understood that the concept of “solicitation” includes any act that has the effect of stimulating investors’ motivation towards making investments in specific products. The concept of “solicitation” is thus very general and broad, and there are no safe harbour rules or other detailed guidelines that an issuer (or a distributor) may rely upon. Accordingly, it is advisable to take a conservative position to the extent possible.

Nevertheless, in order to determine potential investor interest in a fund before an issuer of an investment fund completes the filing, a practical approach would be to meet with potential investors in Japan, provide presentations that show only the general capabilities of the fund (with no reference to fund specifics), and explain to potential investors that no filing has yet been made and that it is not possible to discuss fund specifics with potential investors until the filing is made. This procedure is called “sounding”, and is similar to the process used by broker-dealers to determine preliminary investor interest in products. Once a filing has been completed, it is possible for the fund to re-contact the Japanese potential investors to provide fund documentation and explain the specifics of the fund.

Retail funds can be marketed anyone in Japan.

Any marketing activities that could be regarded as a solicitation of units or shares of the investment fund require the registration of the fund. Such marketing activities include providing a prospectus of funds, advertising funds in newspapers or magazines, and presenting funds to the public.

In addition to the investor protection rules discussed under 2.3.7 Investor Protection Rules, there are regulatory reporting requirements that need to be complied with.

Publicly Offered Fund

The following requirements are imposed under the FIEL, regardless of whether the fund is structured as an investment trust or a partnership, or within or outside Japan. Once the fund is distributed by way of a public offering in Japan, the annual securities report, the semi-annual report and the extraordinary report shall be prepared and filed with the authority for the purpose of continuous disclosure under the FIEL. These continuous disclosure documents are disclosed to the public through the Electronic Disclosure for Investors' NETwork (EDINET) operated by the FSA, which is an electronic filing and disclosure system similar to EDGAR in the USA. The annual securities report shall be filed within three months of the end of the financial year (six months for foreign funds). The semi-annual report shall be filed within three months of the end of the semi-annual period.

Privately Placed Fund

No periodical disclosure is required under the FIEL. However, the performance report shall be prepared and submitted to the FSA and delivered to each shareholder of the investment fund as mentioned in the following paragraph, except for the case where the investment fund in question is a corporate type fund or the private placement is made to qualified institutional investors as defined in the FIEL, provided that certain condition is met. Please note that the performance report is not required for partnerships.

Performance Report

The performance report shall be prepared after the end of the financial period of the investment fund in question under the ITICL if the investment fund is not a corporate type fund. This requirement is applicable to both publicly offered investment funds and privately placed investment funds. However, if the investment fund in question is distributed by way of private placement to qualified institutional investors, and if the constitutional documentation of the investment fund such as the trust agreement, the trust deed, management regulations and the agreement and declaration of trust has a provision that no performance report shall be prepared, such investment fund is exempt from preparing the performance report.

In general, the Financial Services Agency is open to discuss regulatory questions, and regularly publishes guidance on regulatory matters, although it is generally reluctant to give exact timeframes or definite replies on hypothetical questions.

Types of Investments

The ITICL provides that investment trusts and investment companies shall invest their assets mainly (ie, more than 50%) in certain types of investments, as specified in the Cabinet Order (the “Specified Assets”). The Specified Assets include secirities, rights relating to derivative transactions, real estate and leasehold of real estate, monetary claims, and commodities. In addition, in order for investment trusts to be qualified as Securities Investment Trusts for tax purposes (see 2.6 Tax Regime), their assets need to be invested mainly in the securities listed in Paragraph 1, Article 2 of the FIEL (“Paragraph 1 Securities”) and certain derivative transactions relating thereto. Paragraph 1 Securities are traditional securities that have long been defined as securities under relevant regulations, which include corporate bonds, corporate shares, and units of investment trusts, but do not include interests in partnerships and SPCs. There is no specific regulation on the types of investments with respect to limited partnerships.

Custody of Assets

Under the ITICL, the trustee of a Japanese investment trust shall be a licensed trust bank. As such, the assets held by such investment trust need to be deposited with a licensed trust bank. The ITICL also provides that the custodian of a Japanese investment company shall be either a trust company, a licensed securities custodian or a similar entity designated by the regulator. In practice, the custodians of all existing listed J-REITs are licensed trust banks.

With respect to non-Japanese investment trusts and investment companies that are publicly offered in Japan, the rule of the Japan Securities Dealer Association (JSDA) provides that the assets of these funds need to be deposited with banks or trust companies. The JSDA is a self-regulatory body that distributors of publicly offered Foreign Investment Trusts need to join. There is no such regulation for non-Japanese investment trusts and investment companies that are offered in Japan by way of private placement.

Investment Restrictions

Publicly offered non-Japanese investment trusts and investment companies are subject to certain investment restrictions under the rule of the JSDA, which include but are not limited to the following:

  • short sale (applicable only to non-Japanese investment trusts) – the total market value of securities sold short for the account of such fund shall not exceed its net asset value;
  • borrowings (applicable only to non-Japanese investment trust) – borrowing for the account of such fund shall not exceed 10% of its net asset value;
  • derivative transactions – the global risk amount of outstanding derivative transactions and other similar transactions entered into for the account of a non-Japanese fund, which is to be calculated in accordance with a reasonable method, shall not exceed a certain ratio of their respective net asset value;
  • credit risk – credit exposures to any single issuer of portfolio securities or counterparty of derivative transactions shall be managed and administered in accordance with a reasonable method;
  • voting rights of a single issuer – acquiring the shares of any one company is not allowed if, as a result of such acquisition, the total number of shares of such company carrying voting rights held by either (a) all foreign investment trusts managed by the same manager or (b) a foreign investment company would exceed 50% of the total number of all issued and outstanding shares of such company carrying voting rights;
  • transparency requirement – this is applicable only to non-Japanese investment trusts, which shall not acquire any investment that is not listed on an exchange or not readily realisable, such as privately placed shares, unlisted shares or real estate if, as a result thereof, the total value of all such investments held by the non-Japanese investment trust would immediately following such acquisition exceed 15% of the latest available net asset value, providing that this restriction shall not prevent any acquisition of an investment where the method of valuation of such investment is clearly disclosed;
  • acquisition of shares issued by itself – this is applicable only to non-Japanese investment companies, which shall not acquire shares issued by themselves; and
  • inappropriate transactions – non-Japanese investment trusts and investment companies shall not enter into inappropriate transactions that are detrimental to the investors or would be contrary to the proper management of the assets of those funds including, without limitation, transactions that are intended to benefit the asset manager or any third parties other than investors.

With respect to Japanese investment trusts and investment companies, the Investment Trusts Association, Japan (a self-regulatory body of asset managers of these funds) has the detailed investment restrictions.

There is no statutory investment restriction applicable to privately placed non-Japanese investment trusts and investment companies, nor limited partnerships.

Fund finance is not common for Japanese securities investment trusts, in practice, while bank borrowing is usually utilised for leverage in J-REITS. The interest rate at re-financing affects the performance of a REIT, which is required to borrow only from financial institutions.

If investment funds invest mainly in marketable securities such as listed stocks, government bonds and corporate bonds, Securities Investment Trusts under the ITICL are commonly used by Japanese investment managers. Securities Investment Trusts are tax-exempt trusts under the Japanese tax regime and are not treated as pass-through entities.

A Securities Investment Trust is an investment trust that aims to invest more than 50% of its trust assets in Type I Securities (as defined in the FIEL) and derivatives whose underlying assets are Type I Securities. Type I Securities include stocks, bonds and units of investment trusts and shares of investment companies (Article 2, Paragraph 1 of the FIEL).

However, mainly for practical reasons, if such investment funds are denominated in currencies other than Japanese Yen, Foreign Investment Trusts under the ITICL are commonly used. Under the Japanese tax regime, Foreign Investment Trusts are tax-exempt, and are not treated as pass-through entities. A Foreign Investment Trust is defined under the ITICL as a trust that is established in a foreign country under a foreign law, and has a nature similar to investment trusts established under the ITICL.

Investment funds that are used for real estate investments are typically structured as investment companies (Toshi Hojin) under the ITICL (ie, Japanese real estate investment companies – J-REITs). Taxation is imposed on investment companies at the fund level. However, if certain conditions are fulfilled (eg, more than 90% of distributable profits must be distributed to investors), dividends paid to investors may be deducted for Japanese corporation tax purposes.

Investment funds formed as Japanese limited partnerships that are primarily used for private equity investments are pass-through entities for Japanese tax purposes, with taxes being levied on the investors in the fund rather than on the fund itself. Also, investment funds formed as non-Japanese limited partnerships are generally pass-through entities for Japanese tax purposes.

No material legal, regulatory or tax legislative changes that might affect the current environment are expected.

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Trends and Developments


Authors



Anderson Mori & Tomotsune is one of the largest and most international Japanese law firms. It is best known for its long history of advising overseas companies doing business in Japan and in cross-border transactions. The main office in Tokyo is supported by offices in Osaka, Nagoya, Beijing, Shanghai, Singapore, Ho Chi Minh City and Bangkok, as well as a Jakarta Desk and an associated firm in Hong Kong. Anderson Mori & Tomotsune has considerable experience in matters relating to investment funds, including expertise in investment trusts, investment corporations such as J-REITs, infrastructure funds, exchange-traded funds, partnerships and other forms of collective investment schemes. The firm works with increasingly diversified international and Japanese-based investment funds, including private equity funds, venture capital funds, hedge funds, funds of funds and commodity funds. The team consists of about 15 partners and 30 associates, and provides comprehensive advice on all stages of the investment funds process and helps clients to navigate a broad range of regulatory matters relating to asset management.

Investment Funds in Japan

The most popular and widely used form of investment fund in Japan is an investment trust (toushi shintaku), formed pursuant to the Act on Investment Trusts and Investment Corporations of Japan (Investment Trust Act). Investment trusts are marketed and sold on both retail markets (through public offerings) and institutional markets (mostly through private placements). They are also made available for investors in Japan through various other channels, such as Defined Contribution (DC) pension programmes, Variable Annuity (VA) insurance products offered by life insurance companies, and "wrap account" products offered by securities brokers and asset management companies. Most exchange-traded funds (ETFs) listed and traded on the Tokyo Stock Exchange also take the form of investment trusts.

According to statistics published by the Investment Trust Association, Japan (JITA), as of 31 December 2019, the net asset value (NAV) of all publicly offered investment trusts was approximately JPY123.2 trillion, placed in 6,034 funds (excluding investment corporations). At that same time, the NAV of all privately placed investment trusts was approximately JPY98.9 trillion, placed in 6,794 funds (excluding investment corporations). Among the publicly offered investment trusts, 176 funds were ETFs, with a total NAV of approximately JPY43.3 trillion.

The Investment Trust Act also provides for the creation of an investment corporation (toushi houjin) as a form of corporate investment fund. An investment corporation that is primarily used for real estate investments is popularly known as a Japanese Real Estate Investment Trust (J-REIT), which could be misleading since it is not created out of a trust. According to JITA statistics, the NAV of all publicly offered J-REITs as of 30 November 2019 was JPY10.1 trillion (placed in 63 funds, all listed on the Tokyo Stock Exchange). According to the website of the Association for Real Estate Securitization (ARES), the aggregate market price of J-REITs as of 31 December 2019 was approximately JPY16.4 trillion, placed in 64 funds. Per JITA statistics, there were 34 privately placed J-REITs as of 30 November 2019, with a total NAV of approximately JPY2 trillion.

A number of offshore investment funds (those that are established in offshore jurisdictions such as the Cayman Islands, Luxembourg and Ireland) have been offered in Japan, both as public offerings and as private placements. According to statistics published by the Japan Securities Dealers Association (JSDA), 879 outstanding offshore investment funds (including sub-funds under the same umbrella fund) were distributed publicly in Japan as of 31 December 2019. The NAV of all these funds attributable to investors in Japan was JPY6.2 trillion. As of 30 September 2019, funds domiciled in the Cayman Islands and Luxembourg accounted for 52.2% and 37.0% of the total NAV of publicly offered offshore funds, respectively. Most of the remainder of the NAV of publicly offered offshore funds came from offshore funds domiciled in Ireland.

Investment Environment

The Nikkei Stock Average, commonly known as the Nikkei 225, is a representative index of Japanese stocks. The Nikkei 225 generally showed an upward trend in 2019, and climbed approximately 18% to JPY23,656.62 at the end of December 2019 in defiance of a consumption tax increase from 8% to 10% which took place on 1 October 2019, although it did indicate a few fluctuations during the year.

Global equity markets have generally shown upwards trends, but with varying features among different regions and segments. These features reflect, among other things, global economic and political risks, such as post-Brexit turbulence, the political turmoil in Hong Kong, Iran and the US-China “Trade War”.

Interest rate levels in Japan continued to stay close to zero, primarily due to the Bank of Japan’s negative interest rate policy and the value of the Japanese Yen against other major currencies being stable in recent years. This is in contrast to global trends, where it continues to be difficult to accurately predict changes in interest and currency exchange rates.

Considering these factors, it may not be easy for investment funds in Japan to achieve desired performances in 2020 and in the immediate coming years.

Recent Developments

Traditionally, Japanese retail investors have had a strong preference for placing their money in bank deposits and other investments that are considered "safe" or "principal guaranteed", rather than stock markets or other "relatively risky" investments. The Japanese government, in particular the Financial Services Agency of Japan (JFSA), has been introducing several measures to encourage retail investors to invest their money in capital markets for years.

As part of those measures, in January 2014 the Nippon Individual Saving Account (NISA) system was introduced. The NISA system is modelled after the Individual Saving Account system from the United Kingdom. Under the basic NISA system (Basic NISA), individual investors (aged 20 or above) are given a tax exemption on dividends and capital gains derived from listed shares and publicly offered investment trusts. In 2015 the "Junior NISA" system was also introduced, where minors (less than 20 years of age) were also allowed to open specially designed NISA accounts. Furthermore, in January 2018, as an alternative to the NISA account system, the monthly investment (tsumitate) NISA (now called an Accumulation NISA Meet-up) was introduced. According to JSDA statistics, the number of NISA accounts (including Accumulated NISA Meet-up accounts) opened with JSDA member securities brokers, as of 30 September 2019, was approximately 7.82 million. The amount accumulated through investments in the Basic NISA system (from 2014 until 30 September 2019) is approximately JPY11.68 trillion. In 2020, the investment period under the Accumulated NISA Meet-up will be extended by five years, and the Basic NISA will be revised to a two-tiered system with effect from 2024.

In the past decade, a large number of so-called "monthly distribution" investment funds were launched. However, in the recent low-interest environment, many of these funds paid monthly distributions from their capital accounts. Partly due to the JFSA’s repeated criticisms and warnings (including the introduction in March 2017 of the concept of "fiduciary duties", to come under the purview of the JFSA’s regulatory supervision over financial institutions), the number of these "monthly distribution" funds has significantly decreased, despite them still being popular among the older generation of investors.

Another recent trend is the increase in the emphasis on "balanced" or "index" funds over "active" funds, which continued to rise throughout the year in 2019. This could also be due to pressure from the market to lower management fees and distribution fees. The lowering of fees of investment managers and distributors is in line with the JFSA’s expected outcome after the introduction of "fiduciary duties" in 2017. In 2019, some of the distributors – in particular the Internet securities companies – announced that they no longer charge their clients an initial distribution fee (which generally used to be at a rate of 2%-3% of the purchase amount) (ie, selling investment funds on a “no-load” basis). In line with this trend, the aggregated NAV of EFTs also increased by 29.1% in the last 12 months.

Following the JFSA’s announcement of its policy "For Providing Better Financial Services in the Era of Transition – Financial Services Policy: Assessments and Strategic Priorities 2018" on 26 September 2018, the government is continuing its efforts towards "promoting long-term personal asset building" by encouraging long-term, regular and diversified investment, as well as enhanced transparency of investment products. These efforts are in response to growing concerns over the financial sustainability of the public pension system due to a rapidly ageing population in Japan, which is one of the major challenges the country is facing.

Struggling with prolonged low interest rates, banks, financial institutions and pension funds continue to pay close attention to investment funds that can provide good returns in the face of difficult financial conditions. Based on these circumstances, private equity funds, which normally take the form of limited partnerships, become attractive modes of investing for institutional investors and wealthy and high net worth individuals. In addition, several specialised investment trusts have been launched recently, which invest predominantly in certain issues or products by utilising an exemption from credit risk diversification requirements under the rules of Investment Trusts Accusation, Japan.

ARFP

The Asia Region Fund Passport (ARFP) was formally launched on 1 February 2019, and is an international initiative enabling cross-border offerings of eligible collective investment schemes to retail investors with investor protection in economies participating in the ARFP. Joint committee meetings have been held twice since its launch, in May and October, and Australia, Japan, the Republic of Korea, New Zealand and Thailand are the initial participating economies under the ARFP.

Under the ARFP, a fund may be "exported" to another participating economy if it complies with the regulations of the home economy in which the fund is registered, the applicable regulations relating to the offer in the host economy and the ARFP passport rules.

JFSA has started to accept offshore ARFP funds at the time of the launch of ARFP in February 2019; however, Japan has not yet observed any ARFP funds being exported from or imported into Japan.

Anderson Mori & Tomotsune

Otemachi Park Building
1-1-1 Otemachi
Chiyoda-ku
Tokyo 100-8136
Japan

+81 3 6775 1000

inquiry@amt-law.com www.amt-law.com
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Law and Practice

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Mori Hamada & Matsumoto is one of the largest full-service Tokyo-headquartered international law firms. A significant proportion of its work is international in nature, representing clients in cross-border transactions, litigation and other dispute resolution proceedings. MHM has more than 480 lawyers and other professionals, and more than 460 support staff. The firm’s senior lawyers include highly respected practitioners and leaders in the Japanese and international legal community, including prominent law professors at the University of Tokyo and a former Prosecutor-General of the Public Prosecutors Office. MHM is highly recognised by clients and legal professionals in the following practice areas: M&A, joint ventures, finance, international capital markets, asset management, loans and securitisations, private equity, infrastructure/energy, PFI/PPP, insolvency/restructuring, IP, antitrust and competition. Other core practice areas include tax and labour law. MHM has a strong presence in Asia, with offices in Beijing, Shanghai, Singapore, Yangon, Bangkok, Ho Chi Minh City and Jakarta (AKSET Law MHM Jakarta Desk). MHM also has domestic offices in Fukuoka, Osaka and Nagoya.

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Anderson Mori & Tomotsune is one of the largest and most international Japanese law firms. It is best known for its long history of advising overseas companies doing business in Japan and in cross-border transactions. The main office in Tokyo is supported by offices in Osaka, Nagoya, Beijing, Shanghai, Singapore, Ho Chi Minh City and Bangkok, as well as a Jakarta Desk and an associated firm in Hong Kong. Anderson Mori & Tomotsune has considerable experience in matters relating to investment funds, including expertise in investment trusts, investment corporations such as J-REITs, infrastructure funds, exchange-traded funds, partnerships and other forms of collective investment schemes. The firm works with increasingly diversified international and Japanese-based investment funds, including private equity funds, venture capital funds, hedge funds, funds of funds and commodity funds. The team consists of about 15 partners and 30 associates, and provides comprehensive advice on all stages of the investment funds process and helps clients to navigate a broad range of regulatory matters relating to asset management.

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