Katsuji Kamei, staff writer
Mariko Kotaki, tax and finance news bureau editor
The list of companies subject to protection from foreign investment under the revised forex law is causing commotion. The government identifies 518 firms under “core sectors” subject to intensive prescreening before receiving foreign investment, but out of Japan’s three megabanks, Mitsubishi UFJ Financial Group (MUFG) is the only one not included in the list. MUFG was treated differently from Mizuho Financial Group and Sumitomo Mitsui Financial Group (SMFG) because of its answers to two questions.
“Given the conventional industry order, it seemed odd,” said a senior official with the Financial Services Agency after looking at the list the MOF released on May 8. While Mizuho and SMFG are listed under core industries subject to prescreening regulations, MUFG is not in the list. The absence of MUFG stood out since other Mitsubishi-affiliated firms, such as Mitsubishi UFJ Lease & Finance Company, were covered.
MUFG holds assets amounting to over 300 trillion yen. Because of that, it had always been subject to regulations and restrictions whenever they were introduced. But this time it was different. Not being put on the list was not MUFG’s intention. “We don’t know why we didn’t get picked,” said a senior official with the company.
“Do you develop software for programs that handle the personal information of more than 1 million people?” “Do you develop cybersecurity-related software?”
According to informed sources, a questionnaire that the bank received from MOF in March included these two questions. Its answers to them likely became the decisive factor in whether it would be put on the list.
MUFG has a subsidiary that deals in cybersecurity-related software, but the firm’s articles of association do not stipulate cybersecurity as a main business. Meanwhile, Mitsubishi Research Institute, which is included in the list, conducts cybersecurity related operations, but the company is not a consolidated subsidiary of MUFG. On the contrary, SMFG and Mizuho own think tanks under their control.
There was no trace that consideration was given to foreign ownership of stocks in SMFG (42.09%), MUFG (37.78%) and Mizuho (23.05%), either. In view of these points, it can be presumed that inclusion in the list was decided based on whether they have a subsidiary that handles cybersecurity operations or not.
A government source reveals, “We purposely adopted a systematic approach to screening companies based on their articles of association and other factors rather than evaluating the level of importance [for national security] in real terms.” Why? Just before finalizing the selection process this spring, MOF received a request from companies and industry groups which called for making them “less prominent” in the list if they had to be included in it.
These entities worried that if the list has only a limited number of companies, they would attract attention as “forex law issues” and their stock prices could be adversely affected. They may have presumed that if the list contained as many as 500 companies, the focus on their national security-related business might be less prominent and would attract less attention.
MOF has no plan to release its selection criteria or reasons for selection, claiming that “doing so may lead to leaking the secrets of individual companies.” But as companies may change their operations in the future, it will review the list accordingly. However, how and when the list will be reviewed remains to be seen.
The revised forex law will not likely push stock prices down for the time being, as the scope of foreign investors subject to investment regulations is narrow and stock prices remain at low levels. But a person with a leading U.S. securities firm argues: “[Foreign investors] will be able to make accurate predictions to some extent, but the criteria for the selection of companies are not convincing. Since the law limits foreign investment, whether companies are of critical importance to national security or not must be assessed objectively.”
More than half of listed firms, or 2100 issues, are subject to prescreening regulations if companies in “designated sectors,” which are subject to more lax prescreening requirements, are included. The government emphasizes that the forex law was revised to “step up surveillance of investment in companies that are critical to national security,” but including many firms in the list will subsequently affect all of them to some extent.
There is concern that after the COVID-19 pandemic is contained and the global stock market returns to normalcy, foreign investors may forgo investing in Japanese firms and momentum for corporate governance as well as industry alignment may recede. Continuous improvement is necessary to ensure transparency in the selection process.