Snapshot: foreign investment law and policy in Japan

Law and policy

What, in general terms, are your government’s policies and practices regarding oversight and review of foreign investment?

Foreign investments and currency control in Japan are primarily regulated by the Foreign Exchange and Trade Act (FEFTA). The FEFTA aims to ensure proper development of foreign transactions and maintenance of peace and security for both the Japanese and international business communities via certain minimum necessary controls over, and coordination of, foreign transactions. The provisions of the FEFTA are intended to create a balance of payment equilibrium and ensure stability of currencies, thereby contributing to the sound development of the Japanese economy.

The Japanese government’s policies and measures taken with respect to foreign investment are best comprehended by taking an overview perspective of the FEFTA; they aim at promoting a policy open to foreign investors while scrutinising incoming investments having a potential to pose national security concerns.

Under the FEFTA, foreign investments in Japan may be carried out freely. However, certain foreign direct investments (FDI) must be reviewed by the Ministry of Finance and other relevant ministries. Investments originating from countries that Japan does not have treaties regarding inward direct investment with and investments in designated businesses and core businesses may require FDI notification with the Japanese government.

The following business are currently within the scope of designated or core businesses (designated businesses are included in items (1), (2) and (3) and core businesses in (1) and part of (2)):

1. weapons, aircraft, nuclear facilities, space and dual-use technologies;
2. cybersecurity, electricity, gas, telecommunications, water supply, railways, oil, and businesses related to rare-earth metals; and
3. heat supply, broadcasting, public transportation, biological chemicals, certain medical devices, security services, agriculture, forestry and fisheries, leather manufacturing and air or maritime transportation.

Foreign investment notification with the Japanese government must be given via the Bank of Japan (the Japanese central bank) prior to the acquisition of shares of a Japanese company engaging in such businesses at least 30 days prior to the execution thereof. Upon receipt of the notification, the relevant authorities will review and may recommend making changes to, or refuse to implement, the investment. The relevant authorities primarily assess whether the investment is likely to threaten national security, disrupt public order or hamper the protection of public safety. In order to make that determination, they consider the nature of the foreign investor, target companies and contemplated investments. If a foreign investor does not adopt its recommendations, the government may order a modification to or cancellation of the investment. These orders are legally binding.

The Japanese government is promoting a policy of openness to foreign investors while scrutinising incoming investments for potential national security concerns. The FEFTA came under the spotlight in the latter half of 2019 when Japanese authorities started announcing changes to FDI regulations under the FEFTA. The changes that drew most attention were those relating to:

• the expansion of the scope of transactions requiring the filing of prior notification to include businesses relating to:
  • information and communication technology (equipment, software and services); and
  • the manufacture of certain pharmaceuticals and specially controlled medical devices;
• subject to the applicability of some limited exemptions, the lowering of the threshold for the obligation of prior notification from 10 per cent to 1 per cent of the listed company’s shares or voting rights; and
• implementation of an obligation to file prior notification in connection with the appointment of directors and transfer or abolition of businesses in the designated business categories.

The trends mentioned above correspond to recent restrictions on foreign investment in the US and EU among other countries. The expectation is that the legal system will be strongly influenced by future international conditions related to these issues.

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?

While the FEFTA is the main legislation regulating foreign investments, the following laws regulate foreign investments in specific industries.

• The Broadcasting Act (Act No. 132 of 1950): considering that basic broadcasting is a highly influential media outlet, this act restricts foreign investment in basic broadcasters, certified broadcasting holding companies and suppliers for basic broadcasting stations.
• The Radio Act (Act No. 131 of 1950): a radio station licence may not be granted to a foreign national, a corporation represented by a foreign national, a corporation whereby a certain number of directors are foreign nationals or a corporation in which a certain number of voting rights are held by foreign nationals or companies.
• Civil Aeronautics Act (Act No. 118 of 2006): under this act, an aircraft owned by a foreign national, a corporation represented by a foreign national, a corporation whereby a certain number of directors are foreign nationals or a corporation in which a certain number of voting rights are held by foreign nationals or companies may not be registered in Japan. In addition, these individuals and entities may not hold an air transport business licence.
• The Consigned Freight Forwarding Business Act (Act No. 82 of 1989): foreign nationals, corporations represented by foreign nationals, corporations whereby a certain number of directors are foreign nationals or a corporation in which a certain number of voting rights are held by foreign nationals or companies may not hold certain Consigned Freight Forwarding Business licences.
• The Mining Act (Act No. 289 of 1950): mining rights may only be held by Japanese citizens or corporations.
• The Ships Act (Act No. 46 of 1899): to own a ship registered in Japan, at least two-thirds of the company’s board members must be Japanese citizens.
• The Act on Nippon Telegraph and Telephone Corporations (Act No. 87 of 1984): this act regulates the maximum percentage of voting rights held by foreign nationals or companies and the appointment of directors by foreign nationals or companies.

In addition to the above, the Banking Act, the Insurance Business Act, and the Financial Instruments and Exchange Act restrict investors from holding more than a certain percentage of shares in a Japanese company, regardless of whether any such investor can be categorised as a foreign investor.

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 following categories are regulated within the FEFTA’s scope.

• Inward direct investments: investments by foreign investors in domestic entities (including but not limited to direct or indirect share or asset purchases, incorporation of joint ventures and subsidiaries).
• Specified acquisitions: acquisitions by foreign investors of, inter alia, shares of domestic entities held by other foreign investors.
• Capital transactions: inter alia, other than the above categories, deposit transactions and loan agreements between residents and non-residents of Japan.

Pursuant to the 2019 amendment, the FEFTA was expanded to cover acquisitions of minor interests (except those lower than 1 per cent) in the shares of listed companies; as such, its provisions apply to a broader range of target acquisitions.

Prior notification and subsequent review by the authorities are required with respect to inward direct investments and specified acquisitions in certain cases. The applicability of the notice requirement is based on the attributes of the foreign investors and the nature of the business conducted by the target company (except when certain exemptions are available). More specifically, these attributes can be explained as follows.

• Restrictions based on the attributes of the foreign investors are imposed upon, among others, investments originating from jurisdictions where Japan is not a party to an FDI treaty (eg, Iran) or certain activities involving the jurisdiction’s government, entities, individuals or groups.
• Restrictions based on the nature of the business conducted by the target company are imposed on, among others, investments in businesses related to:
  • weapons, aircraft, nuclear facilities, space and dual-use technologies;
  • cybersecurity, electricity, gas, telecommunications, water supply, railways, oil, and businesses related to rare-earth metals; and
  • heat supply, broadcasting, public transportation, biological chemicals, certain medical devices, security services, agriculture, forestry and fisheries, leather manufacturing and air or maritime transportation.

Even if prior notification is required, the foreign investor may have discretion whether to file it if, after consultation with the Ministry of Finance and other competent authorities, it is determined that certain requirements are met. As such, foreign investors (other than certain ineligible persons designated under the FEFTA) may be eligible for an exemption from the requirement for prior notification if they accept the following restrictions with respect to their participation in the target company’s business:

• neither the foreign investor nor its related persons shall become board members or statutory auditors of the target;
• the foreign investor shall not make shareholder proposals for the divestiture of functions or assets of the designated business in whole or in part; and
• the foreign investor shall not access non-public information concerning the target's technology in the designated business (eg, through inquiries presented to the company’s executives), propose any disclosure of such information or request any changes to the target’s internal rules concerning the control of such information.

If the foreign investor is not a financial institution and the target’s designated business qualifies as a core business, to qualify for an exemption, the foreign investor must:

• refrain from attending any meetings of the target’s executive board or committees where decisions concerning the core business activities are discussed; and
• refrain from submitting any written recommendations regarding the core business activities to the target company’s executive board or committees requiring action or response within a specific timeframe.

How is a foreign investor or foreign investment defined in the applicable law?

The FEFTA’s definition of a foreign investor is focused on nationality or capital structure.  ‘Foreign investor’ covers:

1. individuals who are not residents of Japan;
2. corporations or other organisations (including Japanese branches of foreign companies) established under foreign laws and having their principal offices outside of Japan;
3. corporations in which the percentage of the aggregate voting rights directly held by persons included in (1) and (2) or indirectly (through at least 50 per cent ownership of intermediate entities) held by persons included in (1) and (2) is 50 per cent or more; or
4. corporations or other organisations in which the majority of either officers (ie, directors or similar functions) or representative officers are individuals who are not residents of Japan.

Individuals or companies that do not directly fall within the categories mentioned above, but intend to make foreign direct investments on behalf of other foreign investors (whether or not under the name of such investors), shall be deemed foreign investors under the FEFTA.

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?

SOEs and SWFs are deemed foreign investors and are subject to the investment restrictions under the FEFTA.

Moreover, the FEFTA stipulates that investors classified within the category of ‘foreign Investors that are highly likely to constitute inward direct investments, etc. involving national security, etc.’ may not benefit from the exemptions from prior notification. Therefore, as SOEs and SWFs are controlled by foreign governments, they may be deemed classified within the category mentioned above and, as such, will not be entitled to the exemptions from prior notification.

However, since there is a market expectation of SWFs’ investment activities for purely economic and profit-making purposes, in practice, it is possible to be entitled to an exemption by obtaining individual authorisation from the Ministry of Finance. There is some criticism regarding the fact that an exemption is not available solely due to the company being an SOE. Specifically, a letter of confirmation may be issued so that the SWF is not categorised within the scope of ‘Foreign Investors that are highly likely to constitute inward direct investments, etc. involving national security, etc.’ provided that the two following points are verified by the Ministry of Finance:

• the purpose of the investment is purely for investment or profit-making purposes; and
• the investment decisions are made independent from the foreign government.

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 designated business are the competent authorities to review the planned investments under the FEFTA. The Minister of Finance is responsible for the overall supervision of the interpretation and operations of the laws, regulations and the examination process, while the competent authorities are primarily responsible for the examination of prior notifications.

The ministers with jurisdiction over each sector of the business are publicly announced. Such sectors are generally designated as 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 beverages;
• the Minister of Health, Labour and Welfare: pharmaceutical matters and medical devices; and
• the Minister of Economy, Industry and Technology (METI): manufacturing, sales, import and export of aircrafts, weapons and electricity.

Among these sectors, the vast majority of the actual review process falls within the jurisdiction of the METI.

All of the applications, notifications and reports under the FEFTA must be submitted through the Bank of Japan. Under Japan’s FDI regime, the services provided by the Bank of Japan include various functions related to the processing of FDI filings under the FEFTA. These functions include accepting the forms prescribed under the Ministerial Order; serving as the point of contact; and providing guidance to prospective filers regarding the preparation of the filing.

Foreign investors located outside of Japan usually delegate the actual filing and communications with the authorities to external legal counsel based in Japan who have the relevant expertise.

Notwithstanding the above-mentioned laws and policies, how much discretion do the authorities have to approve or reject transactions on national interest grounds?

Factors to be considered in the prior notification review are officially published. The evaluation largely based on the nature of the following:

• the foreign investor;
• target company; and
• investments the investor intends to make.

While in May 2020 the Ministry of Finance and other ministries responsible for relevant business sectors have published factors they would take into consideration when reviewing inward direct investments, the items and language regarding such factors leave room for interpretation. As the factors indicated above are not specifically set out in the FEFTA, in theory, the discretion granted to the competent authorities over the review process is relatively broad. However, in practice, such process is exercised within a reasonable scope in most cases, taking into account precedents and balancing the impact on the various authorities.