The FDI regime applies to Inward Direct Investment (i.e. certain transactions or acts conducted by foreign investors with respect to certain designated businesses) and Specified Acquisitions (i.e. acquisition by a foreign investor of shares or other equity interests in a domestically unlisted company by transfer from another foreign investor).

Minister of Finance and relevant ministries for specific business types. Prior Notifications for covered transactions are made through submissions to the Bank of Japan.

No time limit.

Mandatory depending on the nature of the transaction.

National interests or national security.

The transfer of shares or other equity interests in an unlisted Japanese company from one foreign investor to another foreign investor may be captured.

No reported transactions or acts may be carried out until 30 days have elapsed since the date on which the Minister of Finance and the competent minister received the Prior Notification or Prior Notification for Specified Acquisition.

Imprisonment for no more than two years, a fine of no more than JPY1 million, or both (provided, however, that if three times the value of the subject matter of the violation exceeds JPY1 million, the fine is no more than three times that value).

Yes

Yes. Additional categories of designated businesses were added to protect domestic medical industries.

Yes, FDI is subject to restrictions, filing, and review in Japan under the Foreign Exchange and Foreign Trade Act^[1] (Act No. 228 of 1949 as amended, FEFTA, Gaitamehou). Such requirements apply to Inward Direct Investment and Specified Acquisitions (both as defined in the answer to question 2).

Inward Direct Investment

The following transactions or acts conducted by foreign investors with respect to the Designated Businesses (Inward Direct Investment, Tainaichokutou) are subject to Prior Notification:

• Acquisition of shares or voting rights of domestically listed companies (including over-the-counter publicly traded companies), in which the investment ratio or voting ratio is one percent or more. In this case, the investment and voting ratios include the shares and voting rights of foreign investors who are closely related to the acquirer.

• Acquisition of shares or other equity interests in a domestically unlisted company. This excludes the acquisition of shares or other equity interests by transfer from another foreign investor, which we note may nonetheless require notification as “Specified Acquisitions” as noted below.^[1]

• Consent by a foreign investor to:
  • Substantial changes in the business purpose of a domestic company (limited to cases where the company is a listed company, and foreign investors hold one-third or more of the total number of voting rights).
  • A proposal for the election of directors or statutory auditors.
  • A proposal for the transfer of the whole business (only applicable to cases where the company is a listed company and the foreign investor holds one percent or more of the total number of voting rights).
• Establishment of a branch office, factory, or other business office (excluding resident offices) in Japan by a non-resident individual or a foreign investor who is a foreign juridical person, or substantial changes to such a business’s type or purpose.
• Loans of money with terms exceeding one year to domestic corporations (excluding loans in Japanese currency provided by resident foreign investors) that fall under both bullets included below:
  • The outstanding amount of money lent by the foreign investor to the domestic corporation exceeds the amount equivalent to JPY100 million.
  • The sum of the outstanding balance of money lent by the foreign investor to the domestic corporation, and the outstanding balance of bonds issued by the domestic corporation and held by the foreign investor, exceeds the amount equivalent to 50 percent of the amount specified as the amount of liabilities of the domestic corporation.
• Acquisition of the business from a resident (limited to a juridical person) through an absorption-type demerger or merger (excluding the cases set forth above).

Specified Acquisition

The acquisition by a foreign investor of shares or other equity interests in a domestically unlisted company by transfer from another foreign investor (Specified Acquisition, Tokuteishutoku) is subject to prior notification with the MoF and the competent minister for the business through the BoJ, if the business of the investee or its subsidiary, or the majority of the voting rights of the subsidiary, includes certain designated businesses^[2] (Prior Notification for Specified Acquisition).

The MoF and the competent ministries for each business type are responsible for monitoring investments subject to FEFTA. These ministries include the National Police Agency; Financial Services Agency; Ministry of Internal Affairs and Communications (MIC); Ministry of Education, Culture, Sports, Science and Technology; Ministry of Health, Labor and Welfare; Ministry of Agriculture, Forestry and Fisheries; Ministry of Economy, Trade and Industry (METI); Ministry of Land, Infrastructure and Transport; and Ministry of the Environment. 

There is no specific lookback period limiting the powers of the authorities to investigate deals from an FDI perspective under the FEFTA.

Inward Direct Investment

Foreign investors who intend to carry out an Inward Direct Investment must file Prior Notification prior to the Inward Direct Investment. Any foreign investor who has filed a Prior Notification must also file a post completion notification with the MoF and the competent minister via the BoJ within 45 days of the date the investor carried out certain transactions or acts including:

• Acquisition, disposition or discretionary investment of shares, voting rights, etc.
• Provision of a loan or receipt of a repayment.
• Acquisition or redemption of a bond.
• Discontinuation or abolishment of a branch.
• Succession of the business or disposition of the succeeded business.

Specified Acquisition

Foreign investors who intend to carry out a Specified Acquisition must file Prior Notification for the Specified Acquisition prior to carrying out such Specified Acquisition.

When a foreign investor, who has filed a Prior Notification for the Specified Acquisition, acquires shares or other equity interests and subsequently disposes of them, the foreign investor must file a post completion notification with the MoF and the competent minister for the business through the BoJ within 45 days from the date of the act.

Authorities’ Action and Whistleblowing Mechanism

Authorities such as the MoF can take action on their own initiative. There is a whistleblowing mechanism under Whistleblower Protection Act (Act No. 122 of 18 June 2004).

Generally, no Prior Notification or Prior Notification for Specified Acquisition is required as long as no incorporated Japanese entity is involved, and the transaction is a transfer of shares of a parent company incorporated in a foreign country (e.g., a Dutch parent company’s shares are transferred to a UK entity).  

Prior Notification and Prior Notification for Specified Acquisition must be filed with both the MoF and the competent minister via the BoJ within six months prior to the date on which the transaction or act is to be conducted.

No reported transactions or acts may be carried out until 30 days have elapsed since the date on which the MoF and the competent minister received the Prior Notification or Prior Notification for Specified Acquisition (Prohibited Period). This 30 day Prohibited Period is required in order for the ministries to examine whether the transaction could affect public safety in Japan, etc.  

The Prohibited Period will be shortened to two weeks if the transaction or act does not fall within the category of such investments that could potentially undermine national security, etc.

If the notified matters set out in the Prior Notification are deemed to interfere with national security, the MoF and the competent minister for the business may recommend that the investor change or suspend the investment, and the Prohibition Period may be extended to a maximum of five months.

Any violation of the obligation to file a Prior Notification or Prior Notification for Specified Acquisition may result in criminal punishment (Articles 70 and 72 of the FEFTA), an order for the sale of the business, or other measures as determined by the MoF and the competent minister.

A person who has conducted an Inward Direct Investment or Specified Acquisition:

• while either having failed to provide notification or having made a false notification; or
• during the prescribed prohibition period,

is punishable by imprisonment for no more than three years, a fine of no more than JPY1 million, or both (provided, however, that if three times the value of the subject matter of the violation exceeds JPY1 million, the fine is no more than three times that value).

If the MoF and the competent minister extend the Prohibited Period, and such ministries find, as a result of the examination before the expiration of the extended period, that the Inward Direct Investment may have national security implications, etc., they may, after hearing opinions from the Council on Customs, Tariff, Foreign Exchange and Other Transactions (Council), issue a recommendation that the person who submitted the Prior Notification modify the substance of or discontinue the proposed Inward Direct Investment.

The foreign investor who has received such a recommendation must notify the MoF and the competent minister, within 10 days from the day on which the foreign investor received the recommendation, of whether or not they accept the recommendation. If the foreign investor accepts the recommendation, such investor may only conduct the Inward Direct Investment in compliance with the recommendation. If the foreign investor fails to give notice or refuses the recommendation, the MoF and the competent minister may order such investor to modify the substance of or discontinue the Inward Direct Investment.

If the Prior Notification for the Specified Acquisition has been filed, and the MoF and the competent minister finds it necessary to examine whether the stated Specified Acquisition falls within the category of Specified Acquisitions that are highly likely to undermine national security, the ministers may extend the Prohibited Period for up to four months from the date on which they received the notification. If the MoF and the competent minister extends the Prohibited Period and they find, as a result of the examination, that the Specified Acquisition stated in the notification falls within the category of Specified Acquisitions involving national security, the ministers may, after hearing opinions from the Council, issue a recommendation that the foreign investor who filed the Prior Notification for the Specified Acquisition modify the substance of or discontinue the Specified Acquisition.

The foreign investor who receives such a recommendation must notify the MoF and the competent minister, within 10 days from the date on which the foreign investor received the recommendation, of whether or not such investor accepts the recommendation. If the foreign investor accepts the recommendation, such investor must conduct the Specified Acquisition in compliance with the recommendation. If the foreign investor fails to give notice or refuses the recommendation, the MoF and the competent minister for the business may order that foreign investor modify the substance of or discontinue the Specified Acquisition.

It is not possible to close the transaction before the completion of the FDI procedure. It is necessary to wait to receive clearance of the Prior Notification / Prior Notification for the Specified Acquisition.

It is generally possible to appeal decisions made by the authorities, such as suspension orders for Inward Direct Investments.

Closing conditions are typically included in the relevant transaction agreements, which require the seller to cooperate with the buyer in connection with FDI-related matters. It is common in Japan to have informal discussions with the regulators in the ministries prior to making any type of formal application. As such, a preliminary consultation with the BoJ/MoF (as well as with the competent minister, such as the METI) can be carried out before filing the Prior Notification or Prior Notification for the Specified Acquisition, and such step is recommended in Japan to ensure the application process proceeds smoothly.  

Yes. For example, on 15 June 2020, the MoF, METI, and MIC, in light of the spread of the new coronavirus infection, took necessary measures, such as adding the following categories to the list of Designated Businesses that require Prior Notification, in order to maintain the domestic manufacturing infrastructure of important medical industries related to the lives and safety of the citizens, and to properly prevent situations that could have a serious impact on Japan’s security, human life, or health:

• Manufacturers of drugs for infectious diseases (including pharmaceutical intermediates).
• Manufacturers of highly-controlled medical equipment (including accessories and parts).

The amendment is effective as of 15 July 2020.

The MoF is not so active in reviewing and blocking transactions in connection with Inward Direct Investments and Specified Acquisitions. The TCI case discussed below is one of the only transactions we are aware of in which the government of Japan has effectively blocked a transaction subject to FEFTA and the Prior Notification requirements.

TCI case

With regards to a notification filed by the Children’s Investment Master Fund (TCI) for the acquisition of shares of Electric Power Development Co., Ltd. (J Power), the MoF and METI advised TCI to suspend their Inward Direct Investment, because the acquisition would affect Japan’s policies concerning the stable supply of electricity, nuclear power, and nuclear fuel cycles, and would hinder the maintenance of public order as a result. TCI’s Inward Direct Investment was examined, and TCI were interviewed multiple times.

Finally, it was concluded that if TCI acquired a 20 percent share in J Power, it may then have a certain impact on the management of J Power, which may impair J Power’s financial position through the exercise of shareholder rights based on the acquisition shares, adversely affecting capital investment, repair costs for future core facilities, and the construction and operation of the Oma Nuclear Power Plant.

Therefore, it was determined that there was no way to eliminate the risk of the acquisition impacting Japan’s policies concerning the stable supply of electricity, nuclear power, and nuclear fuel cycles, and that the acquisition carried the possibility of disturbing the maintenance of public order. For this reason, after hearing the opinions of the Council, the government decided to recommend the suspension of the Inward Direct Investment pertaining to TCI’s notification. 

In addition to the changes discussed in the answer to question 12 relating to COVID-19, cybersecurity is another area that has recently received heightened attention in Japan leading to changes to the FEFTA Prior Notification regime. On 27 May 2019, the MoF, METI and MIC took the following measures with respect to Designated Businesses, for which Prior Notification is required, and industries related to Specified Acquisitions, for which Prior Notification for the Specified Acquisition is required.

• In light of the increasing importance of ensuring cybersecurity in recent years, it is necessary to properly prevent the outflow of technologies that are important to national security, such as Japan’s defense production and technological bases. To this end, multiple measures have been taken, including the addition of integrated circuit manufacturing industries to the list of Designated Businesses subject to the Prior Notification requirement.
• The amendment is effective as of 1 August 2019. Foreign investors conducting Inward Direct Investments in the newly-added industries prior to 30 August 2019 are not required to file Prior Notifications due to transitional measures. However, foreign investors conducting Inward Direct Investments in the newly-added industries after 31 August 2019 are required to file Prior Notifications on or after 1 August 2019. Similar transitional measures apply to Specified Acquisitions.

Over the last several years we have seen FDI regimes tighten considerably with various countries adding further restrictions and review requirements for transactions that could potentially implicate national security, and Japan has clearly been a part of this trend, tightening its rules under FEFTA with recent amendments as discussed above. Notably, however, following amendments to expand the U.S. FDI regime under the Foreign Investment Risk Review Modernization Act of 2018, Japan was not selected by the Committee on Foreign Investments in the United States (CFIUS) as one of the handful of countries that received an excepted investor status from the U.S.

The excepted investor status under the U.S. regime exempts qualifying investors from aspects of the U.S. rules on transactions related to real estate, technology, infrastructure, and sensitive personal data. This provides excepted investors a significant advantage over non-excepted investors when pursuing more sensitive investments in the U.S. It remains to be seen whether Japan will attempt to further amend FEFTA or other national security legislation/regulation in the hopes of eventually being selected as an excepted investor by the U.S.

For more information contact Jacky Scanlan-Dyas, Partner, Tokyo and Wataru Kamoto, Partner, Tokyo