Japan Unveils New Foreign Investment Rules for Consultation

Foreign financial institutions subject to regulatory supervision are eligible for a “blanket exemption” from the pre-notification requirement.

Japan’s Ministry of Finance has launched a public consultation on revisions to the Foreign Exchange and Foreign Trade Act (FEFTA), which seeks to lower the notification threshold for foreign investment in “designated business sectors” to 1% from the current 10%.

First revealed last September, the move has been widely seen as a significant new hurdle to investment in Japan, potentially reducing market liquidity and the ability of domestic companies to raise new funds. To address the concerns, certain exemptions will be granted to foreign financial institutions if they satisfy specified conditions.

Under the FEFTA amendment, foreign financial institutions which are subject to regulatory supervision in Japan or other jurisdictions are eligible for a “blanket exemption” from the pre-notification requirement, including securities firms, banks, insurance companies, asset management companies, trust companies, investment trusts, and high-frequency traders.

These firms will be exempt provided their investors or closely-related persons will not become board members of the investee company, propose to transfer or dispose of its business activities in the designated business sectors, or access non-public information about its technology in relation to the designated business sectors.

But, they will still have to file a post-investment report if their shareholdings in a listed company exceed 10%, regardless of sector.

General investors, including sovereign wealth funds and public pension funds, will be eligible for a “regular exemption” from the pre-notification requirement for the “non-core” designated sectors, provided they satisfy the same conditions and pass a screening process, but they will have to file a post-investment report if their shareholdings in a listed company exceeds 1%.

For “core” designated sectors, general investors will be exempted from the pre-notification requirement for stakes under 10%, but post-investment reports are required when shareholdings exceed 1%. For this exemption, they must not be involved in board-level decision-making for the investee company or make board-level proposals.

The 12 “core” sectors designated as having potential national security concerns include weapons, aircrafts, nuclear facilities, space, dual-use technologies, and parts of cybersecurity, electricity, gas, telecommunications, water supply, railway and oil.

The full list of companies that will fall under FEFTA’s scope will be made public towards the end of April. Current expectations are that the new rules will apply to about 500 listed companies.

The changes are expected to enter into force in May, with “full implementation” 30 days later.

The draft rules are summarised here (English) and available in full here (Japanese).

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