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 has undertaken 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 ¥39.7 trillion by the end of 2020, thereby achieving the target. In June 2021, the Japanese government adopted the ‘Strategy for Promoting Foreign Direct Investment in Japan’, which set a new FDI target of doubling the FDI stocks to ¥80 trillion by 2030. The new strategy also established the following three points as basic pillars:

• creation of a new digital market and building of an innovation ecosystem;
• acceleration in the development of business environments in response to global environmental changes; and
• development of an investment environment through public-private partnerships utilising regional strengths.

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 has been gradually tightening the foreign investment regulations, and this government policy is expected to remain unchanged in the next few years. This appears to be in line with global trends such as in the United States, where the US government 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 revisions to the Forex Act, which tighten regulations on inbound equity investments, came into full effect (the 2019 Amendment).

Separately, in July 2020, the government added pharmaceuticals and medical equipment to the list of 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.

In November 2021, the two new categories pertaining to certain critical minerals including rare earths were added to the list to secure a stable supply of such minerals:

• The Japanese government added the following business sectors pertaining to 34 critical minerals:
  • metals mining (including the operation of mineral exploration vessels, and land and underwater surveys for mining);
  • manufacturing, repair and maintenance of, and of software for, devices or products used for metals mining (including mineral exploration vessels, marine equipment, excavators and drilling machines); and
  • mineral analysis services.
• Construction service businesses that improve or maintain port facilities on certain islands to facilitate the activities of mineral exploration vessels.

With respect to the Forex Act procedures, 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 that the foreign investor submit prior notification for certain investments involving (1) particular types of businesses; and (2) 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 geographic-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 usually within 30 days from filing. After the review, the relevant ministries may order a suspension or amendment of the contemplated 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 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. In fact, since liberalisation of FDI in 1980, there has been only one case where the ministries have actually issued a suspension order.

This first, and to date 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 infrastructure 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 have been 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 carried out 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 following two sections look in detail at regulation under the Forex Act in the cases of an acquisition of listed company shares and an acquisition of unlisted company shares.

A foreign investor is generally required to file a prior notification if it acquires 1 per cent or more shares in a listed company that conducts business in the protected sectors under the Forex Act (Designated Business Sectors). 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. Designated Business Sectors include:

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

However, as the prior notification for a listed company’s share purchase (PN-SP) may impose an undue burden on a foreign investor, two exemptions (discussed below) are available if three criteria (Basic Criteria) are satisfied: (1) a foreign investor or its closely related person (eg, its board member, employee, and that of its subsidiary, etc) will not become a board member of the target company; (2) a foreign investor will not propose to the general shareholders meeting a transfer or disposition of important business activities of the target company; and (3) a foreign investor will not have access to non-public information about the target’s technologies that may impact Japanese national security or public welfare.

The first exemption, Blanket Exemption, is available to financial institutions that are licensed or registered under financial regulatory laws in Japan and other jurisdictions, including: securities firms; banks; insurance companies; asset management companies; trust companies (excluding those solely engaged in custody businesses); registered investment companies (including mutual funds and exchange-traded funds); and high-frequency traders (only those registered in Japan). This exemption, however, is not available to foreign state-owned enterprises (SOEs).

The Blanket Exemption provides a comprehensive exemption from filing a PN-SP. A post-facto report, however, will be required when the investor’s total shareholding reaches 10 per cent or more for each transaction.

The second exemption, Regular Exemption, is generally applicable for foreign investors as well as sovereign wealth funds and public pension funds accredited by the Ministry of Finance, but not for (1) an investor with a record of sanctions for violation of the Forex Act; and (2) SOEs. The Regular Exemption’s scope depends on whether a target conducts business in ‘Core Sectors’, which are those sectors in the Designated Business Sector that the government designates as significantly posing a national security risk (eg, armaments, aerospace, nuclear power and dual-use technologies that can be diverted to military use). Core Sectors also include oil, railways, utilities, telecommunications and cybersecurity.

If a target does not conduct business in any of the Core Sectors, a foreign investor will be exempted from filing a PN-SP. However, the foreign investor will be required to file a post-facto report for a listed company’s share purchase when the investor’s total shareholding reaches: (1) 1 per cent for the first time; (2) 3 per cent for the first time; and (3) 10 per cent or more for each transaction. A post-facto report will not be required for a second and subsequent transaction reaching 1 per cent or 3 per cent.

If a target conducts business in any of the Core Sectors, a foreign investor will be exempted from filing a PN-SP only if it holds less than 10 per cent of the shares and two other requirements are satisfied: (1) the foreign investor will not attend and will not have their designated persons attend the target’s board or committee meetings that make important decisions for its business in the Core Sector; and (2) the foreign investor will not make proposals in writing to the board or board members individually requiring responses or actions within a specific deadline.

If a foreign investor acquires one or more shares in an unlisted company that is engaged in the Designated Business Sectors from a resident of Japan, prior notification is generally required. An exemption, however, is available if the Basic Criteria are satisfied and a target does not conduct business in any of the Core Sectors. A post-facto report, however, will be required even if this exemption applies to the share purchase.

Separately, if a foreign investor acquires 10 per cent or more shares in an unlisted company that is not engaged in the Designated Business Sectors from a resident of Japan, a post-facto report is required.

Moreover, prior notification is generally required if a foreign investor acquires one or more shares in an unlisted company that is engaged in any of the Designated Business Sectors from a non-resident of Japan. A foreign investor may be able to obtain an exemption, however, if the Basic Criteria are satisfied and a target does not conduct business in any of the Core Sectors. Even with the exemption, a post-facto report will be required on acquisition of one or more shares in an unlisted company.

While prior notification is not required for a share purchase in an unlisted company that is not engaged in any of the Designated Business Sectors from a non-resident of Japan, other post-facto reports may be required depending on the method of payment that a seller and purchaser use.

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 its government.

The decisions 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.