It has not been good news for Japan's mutual funds industry of late. Well before the September 15 bankruptcy of Lehman Brothers sent global markets into a tailspin û including the Nikkei û the funds industry in Japan had come to an impasse.

Important new legislation meant to streamline Japan's regulatory system (the Financial Instruments Exchange Law) was introduced at the end of 2007. Instead of freeing the industry by introducing British-style principles-based rules, it frightened distributors over misunderstood risk controls to the point that they basically stopped selling funds.

By June, retail mutual funds' assets under management had declined 6% to Ñ63.5 trillion ($649 billion) û and that was before the credit crunch undermined local stock indices and abruptly threw the yen carry trade into reverse, badly hurting many retail investors.

Despite these setbacks, consultancy Cerulli Associates believes the Japanese funds industry is going to get back on track. A combination of institutional and retail demand will allow assets to reach Ñ80.1 trillion ($819 billion) by 2012, representing a five-year compound average growth rate of 3.5%.

It further estimates that total outsourced assets under management in Japan, including discretionary accounts, will hit $4.62 trillion by then.

Underpinning this outlook is the fact that investment advisory business has continued to grow in Japan, with assets managed by investment advisory companies increasing 5% year-on-year to June, to Ñ104 trillion. This has been mainly driven by public pension funds, which have stuck with their internal rules requiring them to rebalance their portfolios in reaction to market movements. Investment advisors (essentially institutional money managers providing segregated accounts) have become more trusted for their global expertise and investment capabilities, Cerulli says.