The revised Foreign Exchange and Foreign Trade Control Act, which regulates investments by foreign investors in Japanese companies, will be applied from June 7. We can understand the government’s desire to keep a watchful eye on the outflow of technologies and information related to national security, but we would like to see the law implemented with a high level of transparency as it could invite lax corporate management.
The act requires foreign investors to submit to the government a prior notification when they acquire shares in companies that are important from the perspective of security. The revised legislation lowers the threshold for prior notification from ”10% or more” to “1% or more.” If the government finds the investment problematic during the screening, it will recommend that the investment be cancelled.
It is common for institutional investors to hold 1% or more of a company’s shares. Foreign financial institutions whose purpose is pure investment are exempted from the prior notification requirement, if they fulfill certain conditions, including not dispatching executives to the company. When the original draft revisions were released, concern spread that foreign investors who regularly trade shares would shy away from Japanese shares. That concern should decrease.
The government has specified 12 “core industries” in which intensive screenings will be required, including weapons and aircraft, nuclear power, and cybersecurity. Western countries are tightening regulations on foreign investment, with China in mind, and it is natural for Japan to keep in step with them so that Japan does not become a loophole.
Prior to the application of the revised law, the government released a list of companies in the core industries. The list was comprised of 558 companies, including Mitsubishi Heavy Industries, which manufactures fighters; Toshiba, which is involved in nuclear power; and Toyota Motor Corp. We commend the government for releasing the list with an eye to enhancing predictability.
What we can’t understand is why the list includes some companies that do not appear to be involved in operations important to security. For example, Gokurakuyu Holdings, which operates large-scale hot bath facilities [super public baths], and Demae-can Co., Ltd., a food delivery service firm
Moreover, of the three megabanks, only Mitsubishi UFJ Financial Group is excluded from the list. This brings into question the consistency of the criteria used to put the list together. The Ministry of Finance, which compiled the list, says it selected the companies based on their articles of incorporation and other materials. They have not, however, released the concrete criteria they used. If they are going to place restrictions on investment, they should clarify the criteria and reasons for selecting the companies on the list.
Including designated companies which are not in a core industry but whose incoming investments are subject to screening that is only slightly less intensive, the total number of companies comes to about 2,100 listed companies. This means the majority of Japan’s listed companies are subject to the regulations.
If there is less possibility that companies will be bought out, there is the risk that companies will survive despite having inefficient management and slumping share prices. We would like to see the government recognize that the regulations could have the side-effect of causing a deterioration in corporate governance and industry reorganization. We would like to see it secure transparent application of the revised law by constantly reviewing the list.