Mariko Kotaki, tax and finance news bureau editor
The Ministry of Finance has published a list of companies subject to protection from foreign buyouts. The move is aimed at going in tandem with the U.S. and Europe, which are stepping up anti-takeover measures with an eye on China. But on the practical front, there are many challenges that need to be addressed. How will Japan be able to protect national security while invigorating the stock market? These two are in a fragile balance.
“We finally made it on time,” said a senior MOF official after the revised foreign exchange law took effect. As the spread of the new coronavirus is throwing the global economy into disarray, Europe and the U.S. are introducing tougher controls on foreign ownership, growing leery of China’s aggressive corporate buyouts.
The creation of the list gave rise to the challenge of its management. MOF made this unprecedented list to help investors make more accurate predictions. It also factored in a request from the business community to “include more companies not to make certain industries stand out.” Subsequently, the list swelled beyond what it had been initially envisaged.
But wider coverage of companies subject to protection from foreign ownership created confusion for market players. For example, Mizuho Financial Group and Sumitomo Mitsui Financial Group are listed as core industries subject to investment restrictions, but Mitsubishi UFJ Financial Group does not require prior government approval to receive a foreign investment.
This is probably because Mizuho and Sumitomo Mitsui partially conduct software and resource-related businesses, but Demae-can and Gokurakuyu Holdings – companies of which importance to national security remain questionable – are listed as core industries.
MOF has no plan to release its selection criteria or reasons. A person with a major law firm points out that “companies can overstate operations that could be subject to protection if they do not want foreign companies to acquire ownership stakes in them.”
Japan has little choice but to require more companies to seek advance government approval for receiving foreign capital as its intelligence is not as powerful and expansive as that of the U.S.
Nonetheless, concerns remain strong that protecting many firms under the revised forex law may make them to grow lax in the medium-to-long term. “Active shareholders may not be able to make proposals to core-sector firms,” says Fumio Matsumoto, chief strategist at Okasan Securities.
In 2019, foreign investors accounted for 70% of the total transactions and established themselves as a catalyst for corporate governance. In the meantime, among industrialized nations Japan remains low in foreign direct investment as a share of gross domestic product (GDP). To achieve a good balance, the work of making improvements to the list and examining its involvement of market players will become indispensable.