The Presence of Foreign Open-End Funds in Japan's Financial Markets

In recent years, the rising share of NBFIs (Non-Bank Financial Intermediaries) in the global financial system has been accompanied by an increase in the presence of foreign open-end funds in Japan's financial markets. This paper first documents the fund flows into equity, bond, and real estate open-end funds investing in Japanese financial assets, as well as their buying and selling behavior, using granular data sets. Similar to the findings by existing studies, we find there are significant outflows from foreign open-end funds investing in Japanese financial assets occurred during events such as the global financial crisis and the COVID-19 pandemic, as well as during episodes of rising policy interest rates abroad. These funds sell their assets, including their Japanese assets, in response to redemption requests. Next, we estimate the sensitivity of asset prices in Japan's stock and REIT markets to asset sales by market participants to understand the impact of trading by foreign open-end funds on Japan's financial markets. The estimated sensitivity is statistically significantly positive and its magnitude is found to be close to estimates for the United States reported in the literature. These findings together imply that outflows from foreign open-end funds could affect asset prices in Japan’s financial markets through asset sales during periods of stress originating abroad or when uncertainty in domestic financial markets rises.