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Japan Foreign Investment Restrictions: Understand the 2 Types of Laws That May Prevent You From Successful Japan Market Entry

To order to successfully enter a new market, it is important to understand foreign investment restrictions. This article will discuss laws related to foreign investment restrictions in Japan, such as the Foreign Exchange Act and the various industry laws.

Overview of foreign investment regulations in Japan

Foreign investment regulations refer to government initiatives to restrict investment from foreigners and foreign companies in a given market.

In the age of globalization, foreign companies have become increasingly active in the Japan market. Differences in language and business culture may have raised the hurdles for many foreign companies to enter the Japanese market. Nonetheless, the expectations of foreign companies investing in Japan are increasing year by year. According to JETRO Invest Japan Report 2022, FDI stock at all-time high of 40.5 trillion JPY aka 294.8 billion USD). 1 Many local authorities in Japan are actively encouraging foreign companies to invest in Japan.

This article aims to provide a better understanding of foreign investment restrictions in Japan.

Laws related to foreign investment restrictions in Japan

Laws related to foreign investment restrictions in Japan are:

  1. Foreign Exchange Act; and
  2. Various industry laws (regulations for the specific industries (e.g., telecommunications, broadcasting, aviation, etc.) with regards to restrictions on foreign investment.

1. Foreign Exchange Act

The Foreign Exchange Act was enacted in 1949. In view of Japan’s economic recovery at the time, foreign transactions were “prohibited in principle and permitted in exception”.

Following Japan’s accession to OECD (Organization for Economic Co-operation and Development) in 1964, “capital liberalization” gradually progressed.

In 1980, the Government of Japan made an amendment to the Foreign Exchange Act to make foreign investment “free in principle”.

In 1996, the Japanese Cabinet proposed a financial system reform known as the “Japanese Big Bang”. This led to fundamental financial market reforms, and further welcomed investment into Japan. These reforms are based on the principles of “free market” (i.e., governed by market principles), “fair market” (i.e., transparent and trusted) and “global market” (i.e., international and forward-thinking).

The Financial System Reform Act came into force in 1998. This led to the liberalization of domestic and foreign capital transactions, and pushed for full liberalization of foreign exchange operations. Examples of the Act’s effects include:

  • Promotion of mutual participation between banks, securities and insurance
  • Lifting of ban on mutual fund sales over bank counter
  • Liberalization of stock trading fees
  • Abolishment of obligation to concentrate on exchanges
  • Introduction of the holding company system
  • Full implementation of consolidated accounts syste.

In 2003, partial amendment of the Foreign Exchange Act included strengthening of counter-terrorist financing measures, and a mandate on provisions relating to identity verification. This is in response in heightened concerns on public security post-9/11.

Another partial amendment to the Foreign Exchange Act, in 2004, has enabled the imposition of restrictions on payments, capital transactions, service transactions, import and export transactions of goods, etc., when necessary for the maintenance of peace and security in Japan.

In 2017, a system was established to order foreign investors to sell their shares, if they have made inward direct investments without notification in relation to investments related to national security. Furthermore, partial amendments to the Foreign Exchange Act to strengthen regulations on inward direct investment to impose an advance notification system in the case of a foreign investor’s acquisition of unlisted shares from another foreign investor subject.

In 2019, under another round of revision of the Foreign Exchange Act, the acquisition of shares in listed companies is now defined on the basis of voting rights, in line with the diversification of investment forms. Previously, acquisition of shares was previously defined on the basis of the number of shares. Acquisitions of shares or voting rights in listed companies were subject to notification under the Foreign Exchange Act if the acquisition would result in 10% or more after the acquisition.

As per the May 2020 amendment, the Foreign Exchange Act will include the introduction of a system exempting prior notification at the time of acquisition of shares, subject to compliance with certain criteria, and a review of the scope of prior notification.

The following are the 3 main amendments for May 2020 with regard to the Foreign Exchange Act:

  1. Definition of closely related persons in relation to the appointment of directors: the draft Ministerial Order is amended to exclude “persons who have been directors of a foreign investor in the past year” from the scope of closely related persons in the case of proposals made by others.
  2. Exemption criteria for not acquiring non-public technology-related information of the investee: In the case of acquisition of such information by M&A advisory departments of financial institutions, etc., the draft notice has been amended such that there will be no violation if information leakage prevention measures have been taken between the departments of the financial institution.
  3. Specifying the competent authorities: In addition to post-reporting after the use of exemptions (less than 10%), the form of the ministerial ordinance has been simplified so that reports can be submitted without specifying the competent authorities for post-reports relating to industries other than designated industries.

Advance screening notification system

Before 2019, according to the Foreign Exchange Act, the industries that require prior notification were defined as those related to national security. Examples include “manufacture of arms, aircraft, nuclear power, space-related and general-purpose products that can be converted to military use”; “electricity, gas, heat supply, telecommunications, broadcasting, water, railway and passenger transport”; “biological product manufacturing and security services”; and “agriculture, forestry and fisheries, oil, leather related, air transport and maritime transport” industries.

Due to the growing need to ensure cyber security and to appropriately prevent incidents that would affect national security (e.g., leakage of critical technology), the applicable sectors for prior notification were expanded in August 2019 to include “information processing-related” and “information and communications” sectors.

In June 2020, following the spread of COVID-19, manufacturing industries related to medicines for infectious diseases (including pharmaceutical intermediates) and manufacturing industries related to highly controlled medical devices (including accessories and parts) were also added to the core industries. This move aims to maintain domestic manufacturing base of the medical industry, which is important for the lives and health of the people.

On 8 May 2020, the Government established and published 518 priority companies for advance screening of foreign investors’ investments. This amounted to 14% of all listed companies. The list of 518 companies are as follows (in Japanese): https://partsa.nikkei.com/parts/ds/pdf/20200508_1.pdf

2. Various industry laws

The various industry laws are laws regulating the respective industries. In certain industries (e.g., telecommunications, broadcasting, aviation) there may be restrictions on investment by foreigners or foreign companies. Below is an overview of these industry laws (links to detailed laws in Japanese):

Japan’s commitment towards foreign investments

We have looked in detail at foreign investment restrictions under the Foreign Exchange Act and the various industry laws. The Government of Japan has adopted a policy of freedom of investment, except in industries where prohibitions to foreign investment are in place due to national security. As seen throughout this writeup, the Foreign Exchange Act has a history of flexible amendments in response to global conditions.

In June 2013, the Government of Japan announced in its Strategy for the Revitalisation of Japan wherein foreign investments would create an environment in which all Japanese companies can benefit from the global economy, as well as attract excellent overseas human resources and technology to Japan to create jobs/innovation and promote the globalization of Japan. According to JETRO, the Government of Japan aimed to double inward FDI balance of 2020 to 35 trillion yen (approx. 258 billion USD). By the end of December 2020, Japan has exceeded its target with FDI balance amounting to 39.7 trillion yen (approx. 291 billion USD).

Moving forward, the Government of Japan intends to continue promoting FDI in Japan and strengthen the Japanese economy’s growth potential as a whole and to promote the revitalization of regional economies. In June 2021, Japan has announced the “Strategy for Promoting Foreign Direct Investment in Japan”. The new target is to double the balance of FDI in Japan to 80 trillion yen (approx. 790 billion USD) by 2030, or 12% of Japan’s GDP. 2

As an independent consulting firm specialising in overseas business expansion into Asia-Pacific, GPC will be more than glad to provide market entry support in order to ensure successful entry into the Japan market. If you would like to find out more about foreign investment restrictions and other steps required for successful Japan market entry, kindly contact us using the button below.

Sources

  1. Japan External Trade Organisation (JETRO). “JETRO Invest Japan Report 2022”. Retrieved from https://www.jetro.go.jp/en/invest/investment_environment/ijre/report2022/
  2. JETRO. “Section1. Strategy for Promoting FDI in Japan and Japan’s Business Environment” Retrieved from https://www.jetro.go.jp/en/invest/investment_environment/ijre/report2021/ch2/sec1.html