Recent Japanese FDI Reforms Mean More Risks for Investors, Law Firm Says
Recent Japanese regulatory reforms and increased enforcement could signal a more "assertive stance” around foreign investment screening, Freshfields said in a client alert last week. The trend in Japan appears to mirror developments with the Committee on Foreign Investment in the U.S., which “has become increasingly assertive in reviewing foreign direct investment.”
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The law firm said Japan has stepped up scrutiny over the last year for inbound investments in sensitive sectors, such as infrastructure, telecommunications and high-tech industries. Authorities are applying the Foreign Exchange and Foreign Trade Act “with renewed intensity,” it said, “a shift driven in large part by rising geopolitical tensions and growing concern over the security of critical supply chains.” Freshfields said it’s expecting the Japanese regulatory environment to become “more restrictive in the short to medium term,” especially for investors linked to foreign states or doing business in strategic industries.
The firm noted that Japan recently narrowed its exemptions for investors that are deemed to be under “substantial influence” by foreign governments. Before the change, foreign investors that weren’t owned or controlled by foreign governments could acquire up to 10% of listed companies in certain “designated sectors” without triggering a prior notification requirement with the Japanese government. “The new rules narrow this exemption regime considerably,” Freshfields said, “introducing a tiered classification system that targets investors based on their relationship to foreign states.”
The change looks to capture foreign investors that may be compelled to gather certain information for their governments, as well as those that aren’t “formally bound by such foreign laws but are considered to occupy a comparable position in practice.”
“How these rules will be applied in practice, and how they will interact with existing exemption schemes remains unclear,” the law firm said. “In many cases, individual engagement with the authorities may be required to clarify the ongoing validity of prior arrangements.”
Japan also introduced a new concept within its FDI screening regime: “designated core business entities.” Those entities may be subject to notification requirements before completing certain deals, the firm said, and they include “major players in power, transport, and telecommunications.”
The firm also said Japan is not only increasing scrutiny on investors from “geopolitical rivals,” but also investors from Western nations, particularly if they have operations in China. “Recent experience suggests that Japanese authorities” are “taking a more expansive view of national security risks,” the firm said, adding that foreign investors with operations in China are being met with “detailed questions about the potential for sensitive information to flow offshore.”
Freshfields said this approach aligns with how CFIUS scrutinizes foreign investments. “For western firms, the implication is clear: a strong operational footprint in China may trigger closer scrutiny in Japan, even if the investing entity is otherwise considered low risk.”