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Gov’t to tighten restrictions on foreign investment

  • October 9, 2019
  • , Nikkei , p. 3
  • JMH Translation

The government has compiled a bill to amend the Foreign Exchange and Foreign Trade Act (FEFTA) to beef up restrictions on foreign investment in Japanese companies in industries seen as key to national security, such as nuclear power and semiconductors. At present, overseas investors must seek advance approval from regulators when seeking to buy stakes of 10% or more in Japanese companies [that operate in strategic sectors]. The proposed change would lower the screening requirement to purchases of stakes of 1% or more. The bill also includes introducing a rule that foreign investors’ board nominations and the transfer of business projects also be subject to advance government review. The bill would bring Japan in line with measures taken by the U.S. and European countries to prevent the outflow of cutting-edge technology, with China in mind, but some are also expressing concern this will throw cold water on investment in Japan.


On Oct. 8, the Ministry of Finance gained experts’ approval of the revision bill at a council subcommittee. The ministry aims to submit the bill to the extraordinary session of the Diet and bring the revised legislation into force in FY2020.


Expand the scope of actions requiring advance reporting


The FEFTA, which stipulates regulations on foreign ownership, requires foreign investors to apply for government screening if they plan to acquire 10% or more of the stocks of listed Japanese companies that run businesses with national security implications, or if they plan to acquire stocks in unlisted companies [in such industries]. Industries subject to this requirement include arms production, aviation, electricity, gas, and telecommunications. In August this year, 20 industries related to information technology (IT), including semiconductor memory, were added to the list of industries subject to foreign capital restrictions.


The revision bill will expand the scope of activities requiring advance notification. The revision will lower the minimum stake that triggers the screening requirement from the current 10% or more of issued stocks to 1% or more. This was based on the fact that the Companies Act allows shareholders who own 1% or more of a Japanese company’s voting rights to bring proposals before a general meeting.


As for Japanese companies in which foreign investors have already invested, the bill will newly require foreign investors to submit advance notification to take actions that would impact company management, including suggesting corporate board nominations and selling key business projects. This means the government will be able to stop such initiatives at its own discretion even if major shareholders agree to them.


On the other hand, the bill will promote investment by making investors who do not aim to get involved in management exempt from the requirement to submit advance notification. Such investors make up 90% of those [currently] submitting advance notifications and include asset management linked to the stock price index.


On Oct. 8, the Ministry of Economy, Trade and Industry announced it will add cutting-edge technologies, including artificial intelligence (AI) and biotechnology, to the export restrictions on next-generation technology under the FEFTA.


U.S. and European countries also beefing up security


Behind the government’s rush to review restrictions on foreign investment is a worldwide trend. With China in mind, the United States decided to substantially fortify its legislation equivalent to Japan’s FEFTA. European nations are also moving in the same direction. Consequently, Japan has a sense of crisis over the matter. “If it does nothing, Japan could become the sole loophole,” said a source connected with the Japanese government.


A number of issues remain. One is adequately ensuring transparency and accountability. Japan decided not to include “those under the influence of foreign governments and the like” in the list of exempt entities. What is envisioned here is state-owned enterprises, but exactly where to draw the line will have to be worked out.


Another issue is the effectiveness of screenings. The government plans to beef up information partnerships with foreign governments and others, but it is no simple task to identify risk in the case of indirect investments.


The government has set a goal of increasing inward direct investment to 35 trillion yen by 2020, so it will be critical to balance risk management and investment promotion.


Main points in the bill to revise the Foreign Exchange and Foreign Trade Act



Before revision

After revision

Tightening of regulations

Threshold for advance reporting

Investment of 10% or more (of issued stocks)

Investment of 1% or more (of issued stocks)

Activities that require advance reporting

Change in company’s business aims, etc.

Board nominations, transfer of key business projects, etc. added

Deregulation (new)

System for exemption from advance reporting

Investments unrelated to corporate management (incl. investments linked to the stock price index) will only be required to submit an ex post facto report. Exemption is granted on the condition that the investor does not obtain undisclosed technology or information.

However the following shall not be exempted:

  • State-owned enterprises and others under the influence of a foreign government
  • Investments in the designated industries where there is a particularly large risk of compromising national security, including arms production, nuclear power, and electricity


Concerns that foreign investment restrictions will lead investors to abandon Japanese stocks


More and more market participants are expressing bewilderment over the plan to amend the Foreign Exchange and Foreign Trade Act. Setting the threshold for advance screening of foreign investment in a Japanese company at 1% could in effect constitute a block [to investment] even if exemptions were put in place because even pure investments frequently exceed 1%. Some say that the legislative amendment could promote a moving away from Japanese stocks. Some are also saying that the change will make it hard to quickly raise funds.


The Tokyo Stock Exchange and securities companies are receiving many inquiries from foreign investors. TSE Executive Officer Hiroki Kawai says, “I understand the importance of national security, but it could make it hard to invest in Japanese companies depending on the content and implementation of exceptions.”


It is hard for foreign investors to carefully inspect the details of a company’s projects and articles of incorporation to tell if a company falls under an industry subject to the restrictions. Even now, some investors restrict their transaction volume so that they do not hit the 10% threshold [in place now]. Some are saying that they in effect will not be able to buy if the threshold is 1% and will have no choice but to withdraw from the investment.


Problems could also arise when companies want to make a capital increase. Toshiba raised 600 billion yen by allocating new shares to about 30 companies and 60 funds. Seeking to avoid insolvency, Toshiba raised funds from foreign investors, who can make investment decisions in a short period of time. In this capital increase, close to 10 companies hold over 1% of Toshiba’s shares. If reporting is required, it will be hard for investors to make fast decisions because they will have to look into the implications of the Foreign Exchange and Foreign Trade Act.

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