Law and policyPolicies and practices
What, in general terms, are your government’s policies and practices regarding oversight and review of foreign investment?
Foreign direct investment into Japan has been generally increasing since 2011. The Japanese government announced its target of increasing foreign direct Investment stock to ¥35 trillion by 2020. The Japanese government has actively opened its doors to foreign investors, in principle, for more than a decade since the Foreign Exchange and Foreign Trade Act (the Forex Act) was amended in 1998. However, this trend seems to be shifting in recent years. Since 2018, the Japanese government started to modestly change the foreign investment regulations to basically tighten the regulations and has continued this move in 2019. This appears to be in line with the global trend: the United Sates has recently taken aggressive measures to prevent technology leaks to foreign countries and the UK is considering whether to expand its powers to block takeovers of sensitive assets. The Japanese government balances an open policy to foreign investors with scrutiny of incoming investment for national security concerns. In August 2019, Japan added cybersecurity to the list of sectors to be protected under the Forex Act, and on 18 October 2019, the Cabinet submitted an amendment bill to the Diet to revise the Forex Act to tighten regulations on inbound equity investment (2019 Amendment Bill). For details of the recent trend including the details of the 2019 Amendment Bill, see question 24.
In general, the requirement for foreign investors making investments in Japan is to submit an ex post facto report to the relevant ministries. The purpose of imposing a reporting requirement is to make a statistical record resulting in no ex post facto review or investigation conducted by the government.
However, the Forex Act requires prior filing for certain limited investments involving (i) particular areas of businesses and (ii) particular geographic areas or countries. These are as follows:
- The business-related restrictions are imposed on, among others, investments on business related to:
- national security (eg, weapons, airplanes, nuclear power, space development, or information and communication technology);
- public infrastructure (eg, electricity, gas, water, telecommunications or railways);
- public safety (eg, vaccine manufacturing or private security service); and
- domestic industry protection (eg, agriculture).
- The area-related restrictions are imposed on, among others, investments concerning countries with which Japan has not executed a treaty on foreign direct investments (eg, Iran) and certain activities involving the Iranian government, entities, individuals or groups.
If the investment falls into such an exceptional category, the party who intends to make such an investment is required to submit prior notification of the intended investment to the relevant ministries. The relevant ministries will then review the filed report in principle within 30 days from filing. After reviewing, the relevant ministries may order a suspension or amendment of the filed investment if they find the investment is likely to:
- impair national security;
- impede public order;
- hamper the protection of public safety; or
- have a significant adverse effect on the smooth management of the Japanese economy.
To date, the Japanese government has rarely exercised its authority to issue an order. In fact, there has been only one case where the ministries have actually issued an order for suspension of investments under the present Forex Act.
Since 1980, when the present Forex Act was enacted, the first and only order for suspension of the investment was issued in 2008 when the Children’s Investment Master Fund (TCI), a UK-based activist fund, intended to purchase up to a 20 per cent stake in J-Power, an electric power wholesaler owning core infrastructures in the Japanese electricity supply such as nuclear plants and electric lines. The relevant ministers announced in their press release that, upon their review, including a series of interviews with TCI, they found risks of impairing the financial condition of J-Power, reduction of future capital expenditure or maintenance spending on fundamental infrastructures, and a negative effect on construction and maintenance of the Ohma nuclear plant (an important plant for Japanese nuclear fuel recycling) if TCI became a holder of 20 per cent shares in J-Power. An official of the Ministry of Finance stressed in an article describing the position of the Japanese government in this instance that this case was exceptional since all other foreign investments (760 filings were made from 2006 to 2008) were approved since the present Forex Act was enacted in 1980.
To provide a comprehensible overview, the answers to the following questions are based on the assumption, except where otherwise specified, that the foreign investments are made through either acquisition of shares or equities, or establishment of a subsidiary, branch or other offices, which are the most popular options usually considered by foreign investors to enter into the Japanese market.Main laws
What are the main laws that directly or indirectly regulate acquisitions and investments by foreign nationals and investors on the basis of the national interest?
The main law is the Forex Act along with supplemental regulations.
Further, the following laws involving specific areas of businesses regulate investments by foreign nationals or set the upper limit of holding ratio by foreign nationals:
- the Broadcast Act;
- the Radio Act;
- the Civil Aeronautics Act;
- the Consigned Freight Forwarding Business Act;
- the Mining Act;
- the Ships Act; and
- the Act on Nippon Telegraph and Telephone Corporations.
Outline the scope of application of these laws, including what kinds of investments or transactions are caught. Are minority interests caught? Are there specific sectors over which the authorities have a power to oversee and prevent foreign investment or sectors that are the subject of special scrutiny?
The Forex Act is applied for foreign investments conducted by foreign investors in the form of, among others:
- the acquisition of 10 per cent or more of shares of listed companies (this threshold is proposed to be lowered to 1 per cent for certain businesses by the 2019 Amendment Bill);
- the acquisition of shares of unlisted companies from the domestic investor;
- the transfer of shares from a non-resident individual to a foreign investor (where a non-resident acquired such shares while a resident);
- the establishment of a branch, factory or other business offices (excluding a representative office) in Japan or substantially changing the type or business objectives of such a branch, factory or other business office, excluding those with the business objectives of:
- foreign insurance;
- certain types of securities;
- investment management;
- foreign trust; and
- fund transfer;
- extending loans to Japanese corporations exceeding certain thresholds; and
- acquisition of private placement bonds issued by Japanese corporation exceeding certain thresholds.
As stated previously, acquisitions of the minority interests, except for acquisitions of less than 10 per cent of the shares of listed companies (this threshold is proposed to be lowered to 1 per cent for certain businesses by the 2019 Amendment Bill), are generally covered by the Forex Act.
Investment in certain sectors, such as investment in the weapons manufacturing business, may fall into the categories in which the prior notifications are required as explained in question 1. Once the prior notification is required, the authorities will review the transaction from the view of whether the investment is likely to impair national security, impede public order or hamper the protection of public safety. There are no rules or regulations requiring special scrutiny for any particular sectors in such reviews by the authorities.
In addition to the above, the Forex Act requires the prior notification of the acquisition of shares of unlisted Japanese companies by a foreign investor from a foreign investor if the target company conducts certain businesses so that the acquisition of the shares of which is likely to impair the national security. Such businesses include:
- manufacturing of weapons and certain related products;
- manufacturing of satellites, rockets and certain related products; and
- manufacturing of nuclear plants and certain related products.
How is a foreign investor or foreign investment defined in the applicable law?
Under the Forex Act, a foreign investor is defined as the following type of individual or entity: (i) non-resident individuals; (ii) corporations, partnerships, associations or other entities established under foreign jurisdictions or having their principal offices in foreign countries; (iii) corporations established under Japanese law of which the ratio of the sum of the voting rights directly or indirectly (through entities of which the ratio of the voting rights held by those listed in item (i) or (ii) is 50 per cent or more) held by those listed in item (i) or (ii) is 50 per cent or more; and (iv) corporations, partnerships, associations or other entities in which the majority of either the officers (ie, directors or similar) or the representative officers are non-resident individuals.
Further, the definition of foreign investor for certain types of limited partnership is proposed to be changed by the 2019 Amendment Bill. Under the current regulations, both general partners and limited partners of a partnership are understood to be individually subject to the notification requirement. Under the 2019 Amendment Bill, only the partnership itself (through its general partner) will be subject to the notification requirement.Special rules for SOEs and SWFs
Are there special rules for investments made by foreign state-owned enterprises (SOEs) and sovereign wealth funds (SWFs)? How is an SOE or SWF defined?
There are no specific rules for investments made by SOEs or SWFs.
However, the 2019 Amendment Bill proposes that certain state-owned enterprises may not be able to enjoy certain exemptions for prior notification that will be established under the 2019 Amendment Bill. Since the 2019 Amendment Bill is not finalised and other incidental regulations and guidelines are not available, the details are not yet known.
For SWFs, the Ministry of Finance explained that certain SWFs, which may be deemed not to pose a risk of impairing the national security of Japan, will be able to enjoy the exemptions under the 2019 Amendment Bill. However, the details (such as how to be deemed not to pose risks of Impairing the national security of Japan) are not yet determined.Relevant authorities
Which officials or bodies are the competent authorities to review mergers or acquisitions on national interest grounds?
The Minister of Finance and the minister with jurisdiction over the targeted business are the competent authorities to review mergers or acquisitions under the Forex Act. Though the decision-making authorities are such ministers, all of the application or reports must be submitted through the Bank of Japan.
Examples of the jurisdictions of the ministers are follows:
- the Prime Minister: banks, trusts, security business, insurance businesses and investment advisers;
- the Minister of Finance: import and export of precious metals and import and export of alcohol;
- the Minister of Agriculture, Forestry and Fisheries: agriculture and fishery and the manufacture of food or drink;
- the Minister of Health, Labour and Welfare: pharmaceutical matters and medical devices; and
- the Minister of Economy, Industry and Technology: the manufacture, sales, import and export of aircraft and the manufacture, sales, import and export of weapons, and electricity.
Notwithstanding the above-mentioned laws and policies, how much discretion do the authorities have to approve or reject transactions on national interest grounds?
For those transactions only requiring ex post facto reports, the authorities will not have any discretion to either approve or reject the transactions as the ex post facto reports are required mostly for the purpose of statistical analysis.
However, in reviewing the transactions subject to the prior notifications, the authorities (the Minister of Finance and the minister with jurisdiction over the targeted business as shown in question 6) have, theoretically, relatively broad discretion under the Forex Act.
What jurisdictional thresholds trigger a review or application of the law? Is filing mandatory?
As explained in question 1, the Forex Act imposes prior notification requirements on investments into certain limited areas of businesses and investments involving certain geographical regions.
As long as the intended investment falls into one of these categories, the filing is mandatory and there are no numerical thresholds such as turnovers, asset size or investment amounts for exemptions. Even in cases where the business triggering the prior notification is relatively small as to the size of the overall business, the filing could be triggered. For instance, if a part of a battery being sold by an electric manufacturer happened to be used in satellites, then the prior notification could be required. As a waiting period of prior notification (see question 11) could delay the whole process, careful review of the targeted business is highly recommended, especially when a targeted company conducts a wide range of business activity such as electrical manufacturers.National interest clearance
What is the procedure for obtaining national interest clearance of transactions and other investments? Are there any filing fees? Is filing mandatory?
An application must be submitted to the Minister of Finance and the minister with jurisdiction over the targeted businesses via the Bank of Japan. Forms for application are available at the website of the Bank of Japan. There are no filing fees.
An application of the prior notification will be reviewed by the relevant ministers. The authority may require hearings, written responses for its inquiries and submission of additional documents.
If the investment does not fall into the categories requiring the mandatory filings explained in question 1, the authorities do not have power to intervene in such investments.
Which party is responsible for securing approval?
An investor is responsible for securing approval. Therefore, if the investment falls into the category triggering the prior notification, it is strongly recommended in practice to make a filing of an application for the prior notification to the relevant authorities and a lapse of the relevant waiting period (see question 11) as conditions precedent to the consummation of the investment.Review process
How long does the review process take? What factors determine the timelines for clearance? Are there any exemptions, or any expedited or ‘fast-track’ options?
Under the Forex Act, if prior notification is required for an investment, a person is required to wait to close the investment for a period of 30 days after the acceptance of the application by the Bank of Japan. However, such a waiting period will be normally shortened to two weeks from the acceptance in accordance with the relevant ordinance. According to the Ministry of Finance, more than 95 per cent of applications have been so shortened. Moreover, with an aim to facilitate more inward investment in Japan, the Ministry of Finance and other relevant ministries have implemented expedited fast-track options for greenfield investment (ie, certain investments involving a wholly owned Japanese subsidiary), rollover investments (ie, certain investments, the same type of which were previously filed within six months by the same investor) and passive investments (ie, certain investments that the investor undertook so as not to proactively participate in the management or to take control of the company). If the fast-track option is applied, the waiting period will be further reduced to five business days.
However, if the authority finds that there needs to be a review procedure on whether the investment is likely to impair the national security, impede public order or compromise public safety, the waiting period can be extended up to five months.
Must the review be completed before the parties can close the transaction? What are the penalties or other consequences if the parties implement the transaction before clearance is obtained?
As explained in question 11, an investor may not close the transaction for which prior notification is required for the relevant waiting period. If the investor closes the transaction in violation of such a time restriction, the investor will be subject to criminal penalties including imprisonment of up to three years or a fine, or both; the fine will be up to three times the amount of the investment or ¥1 million, whichever is higher.Involvement of authorities
Can formal or informal guidance from the authorities be obtained prior to a filing being made? Do the authorities expect pre-filing dialogue or meetings?
The Bank of Japan accepts general enquiries in relation to filing procedures under the Forex Act via the telephone.
The Ministry of Finance and other relevant ministries are generally open for pre-filing consultation if there are any substantive enquiries. Although such a pre-filing consultation is voluntary, it is recommended for an investor to conduct pre-filing consultations, especially if there is any ambiguity in terms of the application of relevant laws and regulations.
When are government relations, public affairs, lobbying or other specialists made use of to support the review of a transaction by the authorities? Are there any other lawful informal procedures to facilitate or expedite clearance?
As explained in question 9, applications of prior notifications will be reviewed by the Ministry of Finance and the minister with jurisdiction over the targeted businesses. As there has only ever been one case where the order for suspension of the investment was issued, the utilising of government relations, public affairs lobbying or other specialists to support the review of the transaction is uncommon. Other than cooperating fully with the review process by the authority, such as providing necessary information that is requested or promptly providing answers to the inquiries, there are no other informal procedures to facilitate or expedite clearance.
The waiting period will be expedited as a default rule set by the ordinance as described in question 11.
What post-closing or retroactive powers do the authorities have to review, challenge or unwind a transaction that was not otherwise subject to pre-merger review?
The competent authorities have the powers to issue an order requiring the foreign investor who failed to make prior notification to divest all or a part of the shares that were acquired or to take such other necessary measures, if necessary, upon seeking opinion from the Council on Customs, Tariff, Foreign Exchange and other Transactions (the Council).
Substantive assessmentSubstantive test
What is the substantive test for clearance and on whom is the onus for showing the transaction does or does not satisfy the test?
An investment subject to prior notification will be reviewed by the authority that will assess whether the investment is likely to impair national security, to impede public order, to compromise public safety or to have a significant adverse effect on the smooth management of the Japanese economy. For example, the Ministry of Finance and the Ministry of Economy, Trade and Information issued an order to suspend investment by the TCI as there was a likelihood that the investment might compromise public safety.
The onus is on the investor to show that the transaction does not fall into any of the above-mentioned categories.
To what extent will the authorities consult or cooperate with officials in other countries during the substantive assessment?
The Japanese authorities have continually stressed that restrictions imposed on foreign investments by the Forex Act are consistent with international standard rules such as the OECD Codes of Liberalisation of Capital Movements and of Current Invisible Operations.
As for a substantive assessment of a specific case, there has been no official data or information suggesting that the Japanese authorities will consult or cooperate with officials in other countries. However, the 2019 Amendment Bill is proposed to authorise the Japanese government to exchange information with foreign government for the purpose of regulatory enforcement by foreign government or authority.Other relevant parties
What other parties may become involved in the review process? What rights and standing do complainants have?
Before issuing an order to suspend or change the content of an investment, the relevant ministers are required to hear opinions from the Council. The Council shall be comprised of academic experts nominated by the Minister of Finance. Competitors or customers may not be involved in the review process. There are no procedures allowing the complainants to participate. Therefore, the complainants have no rights or standing.Prohibition and objections to transaction
What powers do the authorities have to prohibit or otherwise interfere with a transaction?
The Minister of Finance and the minister with jurisdiction over the targeted business have the power to order investors to suspend or change the content of the investment, but only upon the refusal by the investor for the recommendation made by the relevant ministers to suspend or change the content of the investment.
Is it possible to remedy or avoid the authorities’ objections to a transaction, for example, by giving undertakings or agreeing to other mitigation arrangements?
There are no ways of avoiding the authorities’ recommendations or orders that object to a transaction within the review process under the Forex Act, other than regular advocating activities. It should be noted, however, that the decision by the authority can be challenged as explained in question 21.Challenge and appeal
Can a negative decision be challenged or appealed?
A negative decision can be appealed. A party can make an appeal to the relevant ministry challenging the orders rendered by the authority to sustain or change the content of the investment. The ministry receiving a motion of appeal is required to hold a public hearing after giving a reasonably lengthy advance notice.
The party that is dissatisfied with the decision by the relevant ministry in the appeal procedure may opt to bring an action to court.Confidential information
What safeguards are in place to protect confidential information from being disseminated and what are the consequences if confidentiality is breached?
Under the National Public Service Act, government officials owe a confidentiality obligation for the confidential information of which the officials become aware in the course of their duties. As such, any confidential information provided to the government officials in the foreign investment review process will be subject to such an obligation. If an official breaches his or her confidentiality obligation, he or she can incur a criminal penalty of imprisonment for up to one year or a fine of up to ¥500,000. The party may claim for damages against the Japanese government, incurred by the dissemination of confidential information, as long as the required elements under the State Redress Act, for example, an intentional act or an act owing to the negligence of an official, can be established.
Recent casesRelevant recent case law
Discuss in detail up to three recent cases that reflect how the foregoing laws and policies were applied and the outcome, including, where possible, examples of rejections.
As explained in question 1, there has been only one instance since the enactment of the current Forex Act in 1980 where the order to sustain the investment was actually issued, although hundreds of prior notifications of the direct inward investment have been filed each year (see question 1 for the details of the order for the suspension of the investment issued in 2008 against the proposed investment by TCI in J-Power).
Updates & TrendsKey developments of the past year
Are there any developments, emerging trends or hot topics in foreign investment review regulation in your jurisdiction? Are there any current proposed changes in the law or policy that will have an impact on foreign investment and national interest review?Key developments of the past year24 Are there any developments, emerging trends or hot topics in foreign investment review regulation in your jurisdiction? Are there any current proposed changes in the law or policy that will have an impact on foreign investment and national interest review?
The Japanese government has recently been seeking to tighten regulations on foreign investment in Japanese companies that do work in areas sensitive to national security. The two recent hot topics are (i) the recent amendment effective from 1 August 2019; and (ii) the 2019 Amendment Bill, an ongoing bill to be expected in effect in 2020.Recent amendment to expand regulated sectors for foreign direct investments on 1 August 2019
Japan requires a prior approval for foreign direct investments into a very limited number of sectors closely related to national security, public infrastructure, public safety and certain protected domestic industries (eg, agriculture and shipping). With effect from 1 August 2019, the government has expanded the sectors to include information processing equipment and software, and IT-related industries. These newly added sectors include the following:
- the manufacture of devises and components relating to information processing (eg, integrated circuits, flash memory storage media, mobile telephones and computers);
- the production of software related to information processing (eg, custom software development, embedded software services and packaged software services); and
- telecommunication services (eg, wider scope of local/fixed telecommunication services, mobile telecommunications services and support services for the internet).
In addition to the recent amendment above, on 18 October 2019, the Cabinet approved the 2019 Amendment Bill to further promote foreign direct investment conductive to sound economic growth; and ensure minimal review of foreign direct investment that could pose risks to national security.Proposed amendment in the 2019 Amendment Bill
The 2019 Amendment Bill includes the following:Exemption from the prior-notification requirement
The 2019 Amendment Bill will provide certain exemptions for the prior-notification requirement. The details of the exemptions have not been fully described in the bill. It will be covered by Cabinet Order or any other supplementary regulations which are not yet available.
According to the frequently asked questions (FAQ) published by the Ministry of Finance on 31 October 2019 (its English translation is available at www.mof.go.jp/english/international_policy/fdi/faq_191031.pdf), the conditions with which foreign investors need to comply to benefit from exemption are the following:
- the foreign investors or their closely related persons will not become board members of the invested company;
- the foreign investors will not propose transfer or disposition of important business activities of the invested company to the general shareholders’ meeting; and
- the foreign investors will not access non-public information about the invested company’s technology that can impact national security.
The FAQ also mentions that if SWFs and pension funds are deemed to pose no risk to national security, then they are eligible for the exemption from prior-notification requirement.Adjustment of the scope of foreign direct investment: (i) lowering the notification threshold from 10 per cent to 1 per cent, and (ii) expanding the scope of regulated investments
- Lowering the notification thresholds: The 2019 Amendment Bill lowers the threshold to acquisition of 1 per cent of listed shares or voting rights. The background of the 1-per-cent threshold is that, under Japanese Companies Act, a shareholder who owns, consecutively for the preceding six months or more at least 1 per cent of the voting rights may demand directors of the company to present proposals submitted by the shareholder as an agenda at the shareholders’ meeting. Please note that, according to the FAQ, this lower 1 per cent threshold will not be applicable for the investments that trigger ex post facto report requirement. For such investments, the threshold is said to still be 10 per cent.
- Expanding scope of regulated investments: a foreign investor who has an intention to acquire at least 1 per cent of the voting rights in a company may be required to provide a prior notification if the foreign investor has a veto right to any material change to corporate objectives, or to other matters having material impact on the company’s management. The details of the scope will be provided in a Cabinet Order that is not available.
The 2019 Amendment Bill authorises the Japanese government to provide information to foreign governments or authorities that regulate trade activities for the purpose of regulatory enforcement by foreign governments or authorities.Change of definition of foreign investor
The 2019 Amendment Bill will change the definition of foreign investor who is subject to ex post facto report regulation under the Forex Act. Under the current regulations, a limited partnership is not subject to the notification regulation, but each general partner and limited partner of the limited partnership, directly and individually, is required to submit ex post facto report.
The 2019 Amendment Bill will change the regulation for each limited partnership will be subject to the requirement if (i) 50 per cent of more of the funds of the limited partnership is directly or indirectly contributed from foreign investor, or (ii) the majority of the general partners in the limited partnership is foreign investor.Next steps
The above amendments in the 2019 Amendment Bill come as the United States and European nations tighten controls to foreign direct investment related to sensitive technologies that might be leaked to other countries such as China. However, according to recent news sources, some analysists have claimed that the effect of the 2019 Amendment Bill, if they were strict as currently indicated, would chill the Tokyo market, and another analysts have claimed that while portfolio investments will not be subject to the new strict rules, the exact definition of what would fall into that category remains unclear. In response to these criticisms or opinions, the Japanese government has announced that it will publish and update a list of listed companies for (i) companies subject to ex post facto report only; (ii) companies for which prior notification is required but exemption is applicable; and (iii) companies for which prior notification is required and exemption is not applicable.
The 2019 Amendment Bill is currently on the agenda for approval by the Diet and will be supposed to pass by the end of this December. It will take effect on the day within six months from the day of promulgation, to be provided for by the Cabinet Order. As this amendment includes the matters related to shareholder proposals, there is a possibility that it will take effect before the June 2020 shareholder meeting season.