Japan’s New Foreign Investment Rules Take Effect

While a series of exemptions for foreign financial institutions have been granted, the new requirements only allow 30 days for full implementation on 7 June.

An amended law to tighten regulations on foreign investments in Japanese companies came into force on Friday (7 May).

The Foreign Exchange and Foreign Trade Act (FEFTA) revisions require overseas investors to submit a prior notification of stock purchases to the government via the BOJ (Bank of Japan) if they plan to acquire a stake of 1 percent or higher in listed Japanese companies in 12 sectors – oil, railways, utilities, arms, space, nuclear power, aviation, telecoms and cybersecurity.

The previous threshold was set at 10 percent.

If the target investee company does not conduct any business in any designated business sector, a post-facto investment report is sufficient after the acquisition of shares.

518 designated companies

The Ministry of Finance on Friday released a list of 518 companies (download) in the 12 sectors deemed important to Japan’s national security (14 percent of publicly traded companies) – including Toyota, Sony, Mitsubishi Heavy Industries, Hitachi, Tokyo Electric, Central Japan Railway and SoftBank.

In response to the Covid-19 pandemic, Japan plans to also designate the advanced medical industry as a highly sensitive sector in mid-July, to ensure the stable supply of necessary drugs and equipment for domestic use.

In its list, the Ministry of Finance has divided Japan’s 3,800 listed companies into three categories – those requiring prior notification, those not requiring prior notification, and those with exemptions in some cases.

A 30-day grace period until 7 June is allowed for full implementation. During this period foreign investors will be expected to submit a prior notification if they plan to purchase 1 percent or more of the designated companies.

If clearance is obtained, the foreign investors will be permitted to purchase stocks up to the notified amount at any time within a six-month period.

The move to tighten foreign investment restrictions is said to be aimed at preventing sensitive information and critical technologies from leaking to other countries (such as China), and follows similar steps taken by the US and EU nations to protect national security.

Exemptions for foreign FIs

The FEFTA provides ‘blanket exemptions’ from the prior notification requirement for foreign-supervised financial institutions – including banks, securities firms, insurance companies, asset managers, trust companies and high-frequency traders – if they plan to buy stocks for asset management purposes.

As stated in a consultation on the FEFTA revisions released in March, exemptions can be obtained where foreign institutional investors do not plan to become board members, propose to transfer or dispose of certain business activities, or access non-public information about investee companies’ technology.

Under the new rules, sovereign wealth funds and pension funds are eligible for a ‘regular exemption’ from the pre-notification requirement if they pass a screening process and execute an MoU with the Japanese government, but post-investment reports will still be required if they exceed the 1 percent threshold.

Foreign state-owned entities, except those that have been accredited by the Japanese government, will generally not be entitled to these exemptions.

The exemptions were reiterated in a 24 April Cabinet Order to implement the FEFTA. The related rules and regulations were promulgated on 30 April.

For more information on coping with the increasingly complex shareholding disclosure requirements in various jurisdictions, including Japan, register for our webinar on 28 May.

Additional reporting from Morgan Lewis, The Mainichi, Nikkei Asian Review

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