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?

With a view toward enhancing the growth potential of the Japanese economy and to reinvigorate regions around the country, the Japanese government undertook measures to increase inward foreign direct investment (FDI). Accordingly, in 2013, the Japanese government announced its target of increasing FDI stock to ¥35 trillion by 2020, and FDI stocks have grown steadily since to ¥33.9 trillion by the end of 2019. In July 2020, the Japanese government announced that it would formulate the Medium and Long-term Strategy for Promoting Foreign Direct Investment in Japan 2021 by spring 2021, which may include the next FDI target. The Japanese government also announced that the new strategy should be responsive to: the current climate for inward FDI; the shrinking economies in local areas and growing difficulty in business succession with a falling birth rate and aging population; and the progress of the Fourth Industrial Revolution around the world and intensifying global competition.

The Japanese government actively opened its doors to foreign investors, in principle, for more than a decade after the Foreign Exchange and Foreign Trade Act (the Forex Act) was amended in 1998.

However, this trend seems to have shifted in recent years. Since 2018, the Japanese government started to gradually tighten the foreign investment regulations and has continued to do so in 2019 and 2020. This appears to be in line with global trends such as in the United States, which has recently taken aggressive measures to prevent technology leaks to foreign countries.

The Japanese government is promoting an open policy for foreign investors while scrutinising incoming investments over possible national security concerns. In August 2019, Japan added cybersecurity to the list of sectors to be protected under the Forex Act. Further, the 7 June 2020 revision to the Forex Act, which tightens regulations on inbound equity investments, came into full effect (the 2019 Amendment).

Separately, in April 2020, the government announced that, effective from 15 July 2020, pharmaceuticals and medical equipment would be added to the list of the protected sectors (see below for the particular types of businesses that the Forex Act protects) to ensure a stable domestic supply of these medical products amid the covid-19 pandemic and in the event of potential future outbreaks. These include manufacturers of vaccines, heart and lung machines, ventilators and pharmaceuticals.

In general, foreign entities investing in Japan must submit an ex post facto report to the relevant ministries. The purpose of this requirement is to enable the government to make a statistical record of the number of ex post facto reviews and government investigations.

However, the Forex Act requires prior filing in certain limited investments involving particular types of businesses and particular geographic areas or countries. These are as follows:

• The business-related restrictions are imposed on, among others, investments in any 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, medicine, medical equipment, vaccine manufacturing or private security service); and
  • protected-domestic industry (eg, agriculture).
• The area-related restrictions are imposed on, among others, investments concerning countries with which Japan has not executed an FDI treaty (eg, Iran) and certain activities involving the Iranian government, entities, individuals or groups.

If the investment falls into one of the above categories, 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 the review, the relevant ministries may order a suspension or amendment of the filed investment, if they find the investment is likely to:

• threaten national security;
• disrupt 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 investment suspension order under the current Forex Act. There has been only one case where the ministries have actually issued a suspension order.

Since 1980, when the Forex Act was enacted, the first and only investment suspension order was issued in 2008. At that time, 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, a Japanese electric utility owning core infrastructures including nuclear plants and power lines. The relevant ministers announced that, upon their review, including a series of interviews with TCI, the investment risked impairing J-Power’s financial condition, reducing future capital expenditure or maintenance spending on fundamental infrastructures, and causing negative effects on the construction and maintenance of the Ohma nuclear fuel recycling plant. A Ministry of Finance official publicly described the Japanese government’s position in this instance as exceptional given that all other foreign investments were approved since the Forex Act was enacted in 1980.

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 Forex Act (along with supplemental regulations) is the main law.

Further, the following other laws regulate investments by foreign nationals or set the upper limit of holding ratios by foreign nationals in specific business sectors:

• 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 to foreign investments conducted by foreign investors in the following situations, among others:

• the acquisition of 1 per cent or more of shares of listed companies;
• the acquisition of shares of unlisted companies from a domestic investor;
• the transfer of shares from a non-resident individual to a foreign investor (where a non-resident acquired these shares while a resident);
• when consent is sought for any material change to corporate objects, or to other matters having a material impact on the management of the target company or companies;
• the transfer of a business from a Japanese entity;
• the establishment of a branch, factory or other business office (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:
  • banking;
  • foreign insurance;
  • gas;
  • electricity;
  • certain types of securities;
  • investment management;
  • foreign trust; and
  • fund transfer;
• the extension of loans to Japanese corporations exceeding certain thresholds; and
• the acquisition of private placement bonds issued by a Japanese corporation exceeding certain thresholds.

The Forex Act generally covers the acquisition of minority interests, except for the acquisition of less than 1 per cent of the shares of listed companies. As the 1 per cent threshold may impose an undue burden on a foreign investor, the recent 2019 Amendment introduced two exemptions.

Investment in certain sectors, such as in a weapons manufacturing, may fall into the categories in which prior notification is required. If required, the authorities will review the transaction to determine whether the investment is likely to threaten national security, disrupt 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.

In addition to the above, the Forex Act requires prior notification when a foreign investor seeks to acquire the shares of an unlisted Japanese company from another foreign investor, if the company conducts certain business such that the acquisition is likely to threaten national security. For the avoidance of doubt, unlike unlisted companies there are no thresholds. These categories of businesses include:

• manufacturing weapons and certain related products;
• manufacturing satellites, rockets and certain related products;
• manufacturing nuclear plants and certain related products; and
• manufacturing semiconductor devices.

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

The Forex Act defines a ‘foreign investor’ as: (1) a non-resident individual; (2) a corporation, partnership, association or other entity established under a foreign jurisdiction or having its principal office in a foreign country; (3) a corporation established under Japanese law of which the ratio of the sum of the voting rights directly or indirectly held by those listed in item (1) or (2) is 50 per cent or more, including through entities of which the ratio of the voting rights held by those listed in item (1) or (2) is 50 per cent or more; and (4) a corporation, partnership, association or other entity in which the majority of either the officers (eg, directors) or the representative officers are non-resident individuals.

Further, the definition of foreign investor for certain types of limited partnership has been changed since the 2019 Amendment. Both general partners and limited partners of a partnership had been individually subject to the notification requirement, but under the 2019 Amendment, only the partnership itself (through its general partner) will be subject to the notification requirement.

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 are not able to enjoy exemptions from prior notification.

However, SWFs that are deemed not to pose a risk of threatening national security are eligible for an exemption from prior notification of a listed company stock purchase if accredited by the Ministry of Finance.

For an SWF to obtain accreditation, the Ministry of Finance will enter a memorandum of understanding (MOU) with the SWF, if the Ministry believes both of the following conditions are satisfied:

• the SWF’s investment activity is only for economic return; and
• the SWF’s investment decision is made independently of their government.

The decision to enter an MOU and for accreditation are not made public.

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 applications, notifications or post-facto reports, which are required under the Forex Act, 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 beverages;
• the Minister of Health, Labour and Welfare: pharmaceutical matters and medical devices; and
• the Minister of Economy, Industry and Technology: manufacture, sales, import and export of aircraft, 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 do 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 notification requirement, the authorities (the Minister of Finance and the minister with jurisdiction over the targeted business) have, theoretically, relatively broad discretion under the Forex Act.

Law stated date

Give the date on which the information above is accurate.

20 November 2020.