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* Investors pull out 31 bln yen from toushin
* First net fund outflow in 6 months
* Financial industry freezing toushin sales after FSA criticism
* FSA says 99 pct of toushin not suitable for long-term investment
* New toushin launch likely to hit record low in May
By Tomo Uetake and Hideyuki Sano
TOKYO, May 16 (Reuters) - Japanese investment trusts, or "toushin", saw the first net outflow of funds in six months in April, the industry data showed on Tuesday, after the head of the country's financial watchdog made a scathing criticism on the industry.
Investors pulled out 31.1 billion yen ($275 million) of funds out of "toushin" in April, the first monthly net outflow since October.
In another indication of the slowdown in business, the number of new fund launches in May was also likely to be around 20, which would be the lowest on record in data that dates back to 2007, said the Investment Trusts Association, Japan.
If outflows from the toushin funds accelerate, that could force fund operators to sell assets they have invested and affect markets.
Industry officials say many financial institutions have slowed or refrained from aggressive sales of some toushin funds after Nobuchika Mori, the commissioner of the Financial Services Agency, blasted Japanese asset management industry for not catering to the true benefit of its customers.
In a speech to financial professionals in early April, Mori railed at Japanese investment trusts' high fees and low investment returns.
The average return of about 280 active Japanese stock funds is 1.4 percent over the last 10 years after deducting fees, with a third of them making losses, compared to average annual gains of 3 percent in the Nikkei share average, he said.
Noting that a panel of experts concluded that 99 percent of toushins are unsuitable for long-term investment, Mori called for fund operators to take an action.
"How long are you going to keep this practice? Would customers who could not get a decent return on financial products they bought increase investment?" Mori challenged industry officials.
Shocked by his blunt public rebuke, asset management firms virtually stopped sales activities, industry sources said.
"After the FSA's comments, sales staff are in the dark on what they should sell, or recommend to their customers," said an executive at a European asset management firm.
They say net fund outflows appear to be increasing in May. Asset management firms are expected to disclose plans in June to make themselves more customer-oriented.
Yoshio Okubo, vice chairman of the Investment Trusts Association said he cannot rule out the possibility that Mori's comments had some impact, adding that the industry will make efforts to win confidence of the public.
The Japanese investment trust industry manages about $1 trillion yen of assets, channelling Japanese investors' funds to stocks, foreign bonds and currency markets.
$1 = 113.30 yen Additional reporting by Emoto Emi; Editing by Simon Cameron-Moore