The Impact of Fund Turnover on Japanese Mutual Fund Performance

Japanese open-end mutual funds are churned almost six times as much as mutual funds in the United States. We find that funds with high inflows could underperform those funds with no inflows by more than 7% per annum during periods of high fund flow activities. Although Cai, Chan, and Yamada (1997) and Brown, Goetzmann, Hiraki, Otsuki, and Shiraishi (2001) point to the tax-dilution effect as one of the possible explanations for the large underperformance of Japanese equity funds, these studies have overlooked the impact of the high fund turnover of Japanese mutual fund investors. In contrast to the 1980s when large underperformance in Japanese equity funds coexisted with high fund turnovers, we find that the underperformance almost disappears in the 1990s when fund turnovers became lower