The outflow of important technologies that threats national security must be prevented. It is hoped that appropriate regulations will be imposed, while being wary of causing a situation in which foreign investors steer clear of investing in Japanese companies.
The revised Foreign Exchange and Foreign Trade Law has come into effect to strengthen regulations on foreign investment in Japanese companies. It focuses on foreign investment in Japanese companies that are highly important from the viewpoint of security.
Under the revised law, foreign investors are required to submit to the government a prior notification when they acquire 1% or more of outstanding shares or 1% or more of voting rights of listed companies. This is because, in principle, shareholders with 1% or more of shares in a listed company can submit proposals at shareholders’ meetings, such as requests for business transfers and dispatches of executives. Before the revision of the law, the criterion for the restrictions was 10% or more.
Fierce competition for hegemony in high-tech fields can be seen, such as between the United States and China. It is reasonable that the revised law is aimed at preventing the leakage of advanced technology that can be used for military purposes.
After receiving the notifications, if the government finds a problem with a planned investment during the screening process, it would recommend a change or cancellation of the investment.
The United States and Europe are tightening regulations on foreign investment, with China and others in mind. In line with international trends, it is necessary to make concerted efforts to prevent Japan from becoming a “loophole.” It is hoped that making the screening process stricter will lead to the enhancement of the effectiveness of the regulations.
The government has specified 12 “core industries” in which intensive screenings will be required, including weapons and aircraft, cyber security, telecommunications and nuclear power. It has released a list of companies that fall into these categories.
More than 500 companies, such as Mitsubishi Heavy Industries Ltd. and Toyota Motor Corp., are included. However, among three megabanks, only Mitsubishi UFJ Financial Group Inc. was excluded from the list. At the same time, food delivery service firms were included. The standard for the specification is difficult to understand.
The government said that it made judgments automatically, based on articles of incorporation and other factors, and has not disclosed specific reasons for the decisions. The government needs to explain carefully so that investors do not get confused.
One of the initial concerns raised by the revision of the law was that foreign investors would become reluctant to invest in Japanese companies, scared off by complicated procedures. Foreign investors account for 70% of the transactions in the Japanese stock market.
For this reason, the revised law set a provision that foreign financial institutions whose purpose is pure investment rather than participation in management — such as banks, securities companies and funds — are exempted from the prior notification requirement. The provision is applied if they meet certain conditions, such as that persons concerned will not take executive posts.
It is commendable that the revised law took a potential negative impact on the stock market into account.
The possibility still remains that assertive shareholders, who strongly press companies for reforms, might keep away from the Japanese market. But constructive proposals from shareholders are expected to play a role in improving the management efficiency of companies.
In order for corporate managers not to lose a healthy sense of tension, the well-balanced application of the revised law, which makes strengthening of security and corporate governance compatible, is indispensable.
— The original Japanese article appeared in The Yomiuri Shimbun on June 10, 2020