The primary legal source of foreign investment restrictions is the Foreign Exchange and Foreign Trade Act of Japan (the “FEFTA”), which underwent a major reform in 2020. 

Under the FEFTA, a Foreign Investor needs to file a prior notification and obtain governmental approval before the closing of a transaction when (i) the Foreign Investor acquires any shares in a Japanese non-listed company, acquires 1% or more of the shares or voting rights in a Japanese listed company, or otherwise undertakes an action defined as an “Inward Direct Investment” in relation to a Japanese company, and (ii) such Japanese company or its subsidiaries (including 50% subsidiaries) conduct business in a Designated Business Sector unless an exemption rule applies. A post-transaction report (i.e., notice) is also required for certain foreign direct investment transactions, regardless of the business sector.

In addition, with respect to certain licensed businesses, including broadcasting, radio stations, air transport, and freight transport, the relevant industry acts provide various restrictions on foreign investors’ shareholding or holding voting rights in the licensed operators of such businesses.

In principle, Japan’s foreign investment restrictions focus on national security.  However, in certain limited cases, Designated Business Sectors are designated based on economic protectionism.

Under the FEFTA, “Foreign Investor” means an individual or entity that is a non-resident of Japan, and/or a Japanese resident company for which 50% or more of the voting rights are directly or indirectly owned or controlled by a non-resident of Japan.

Under the FEFTA, Designated Business Sectors are designated from the standpoint of protecting national security, maintaining public order, safeguarding public safety, and ensuring the smooth functioning of Japan’s economy.  Major examples of Designated Business Sectors are as follows.

• Weapons
• Aircraft
• Nuclear facilities
• Space
• Dual-use technologies
• Infectious disease medicine and Specially controlled medical device
• Mining of critical mineral resources
• Semiconductor and its manufacturing equipment, parts and materials
• Lithium-ion battery (for vehicle and stationary use) and its parts and materials
• Permanent magnet and its parts and materials
• Industrial Robots, Numerically Controlled Machine Tools
• Cybersecurity
• Electricity
• Gas
• Telecommunications
• Water supply
• Railways
• Oil
• Heat supply
• Broadcasting
• Public transportation
• Biological chemicals
• Security services
• Agriculture, forestry, and fisheries
• Leather manufacturers
• Air transportation
• Maritime transportation

In addition, among Designated Business Sectors, the following subset of businesses are designated as Core Sectors.

• All business activities of the following sectors
  • Weapons
  • Aircraft
  • Nuclear facilities
  • Space
  • Dual-use technologies
  • Infectious disease medicine and specially controlled medical devices
  • Mining of critical mineral resources
  • Semiconductor and its manufacturing equipment, parts and materials
  • Lithium-ion battery (for vehicle and stationary use) and its parts and materials
  • Permanent magnet and its parts and materials
  • Industrial Robots, Numerically Controlled Machine Tools
• Part of the following sectors
  • Cybersecurity
  • Electricity
  • Gas
  • Telecommunications
  • Water supply
  • Railway
  • Oil

(1)  Acquisition of listed company’s shares/voting rights; 1% and 10%

In regard to the acquisition of shares or voting rights of a listed company, the basic threshold is 1%. If a Foreign Investor intends to acquire 1% or more of the shares or voting rights in a Japanese-listed company that conducts business in a Designated Business Sector, the Foreign Investor needs to file a prior notification and obtain governmental approval, unless such Foreign Investor takes advantage of an exemption rule.

In 2020, the FEFTA amendment introduced a complex system of exemption rules that enables certain qualified passive investors and foreign financial institutions who agree to comply with the following exemption conditions (called “General Exemption Conditions”) to acquire shares of a listed company without prior notification. 

• The investor or its closely related persons will not become board members of the company;
• the investor will not propose at a shareholders’ meeting the transfer or disposition of business activities undertaken in relation to a Designated Business Sector; and
• the investor will not access non-public information about the company’s technology used in a Designated Business Sector.

Nonetheless, in the case of a listed company that conducts business in a Core Sector, the thresholds are 1% and 10%. In order to acquire and hold 10% or more of such listed company’s shares or voting rights, every investor (other than foreign financial institutions who comply with the General Exemption Conditions) is required to make a prior notification. In order to be eligible to be exempted from a prior notification for acquiring shares or voting rights which results in holding shares or voting rights of 1% or more, but less than 10%, a foreign investor (other than foreign financial institutions) needs to agree to the following additional exemption conditions (called “Additional Exemption Conditions”). 

• The investor will not become a member of any committee of the listed company that makes important decisions with respect to Core Sector business activities; and
• the investor will not make written proposals that require a response or action by a certain deadline to the board of directors of the listed company (or any member thereof) or any committee of the listed company regarding Core Sector business activities.

(2)  Acquisition of non-listed company’s shares; no threshold

There is no particular threshold for the acquisition of shares in a non-listed company. Therefore a Foreign Investor needs to make a prior notification when it acquires any shares in a Japanese non-listed company.  When acquiring the shares of a non-listed company that does not conduct any business in a Core Sector, a Foreign Investor can take advantage of exemption rules so long as the investor agrees to the General Exemption Conditions.

Under the FEFTA, prior notification is mandatory if a certain transaction triggers the prior notification requirement. 

If a transaction does not trigger the prior notification requirement, only a post-transaction notice report needs to be submitted. 

It is required prior to closing.

The businesses of infectious disease medicine and specially controlled medical device manufacturing have been newly added as Designated Business Sectors.

The review status of individual cases is not public unless the screening authorities (the Ministry of Finance and any ministry having jurisdiction over the applicable Designated Business Sector) formally issue a recommendation or an order to change or suspend the investment plan. To date (October 26, 2023), no such formal administrative actions have been taken since the amendment of the FEFTA in 2020.

The screening authorities usually complete their review in the first phase review period (i.e., 30 days) or less.  In certain limited cases, if the screening authorities determine that further examination is required, the review period can be extended for another four months. In practice, when a screening authority determines that it needs to inquire with a foreign investor on certain covenants related to the subject investment in order to address national security concerns, the notifying party could be requested to voluntarily withdraw their notification until the investor agrees to covenants which are satisfactory to the screening authority. There is no time limitation for such discussion of the covenants.  In some difficult cases the screening authority’s review tends to be long and it may cause a substantial delay in the transaction. 

Factors to be considered in the screening process include, among others, the impact on the basis of production and technology of the concerned business, the possibility of leakage or unintended use of technology or information, the degree of impact of the investment on the investee company’s business in view of the current and envisaged shareholdings and loans, and the background of the foreign investor (i.e., beneficial ownership and business relationships, as well as the foreign investor’s post-investment plan and track record of its behavior in relation to the investment).

The planned transaction may be blocked if the screening authorities determine that the investment in question is likely to cause a situation that (i) would compromise national security, create a barrier to the maintenance of public order, or interfere with the preservation of public safety, or (ii) would have a significantly adverse impact on the smooth operation of the Japanese economy.

As of today (October 26, 2023), there are no cases that have been officially blocked in the last six months.

Currently, there are no active discussions to further amend the FEFTA or the relevant regulations.

After the Economic Security Promotion Act passed in 2022, the related policies and regulations were introduced, and such progress is making the FDI screening more strict in certain areas and has expanded the scope of the business sectors subject to FDI control, and it is expected to continue as there will be further regulations that take into effect in relation to the Economic Security Promotion Act.