Business / Financial Markets

Japan passes bill to tighten rules on foreign investments related to national security

Kyodo, JIJI, Bloomberg

The Diet passed a bill Friday to tighten regulations on foreign investments in listed Japanese companies related to national security, including arms production and nuclear energy, following similar steps implemented in Europe and the United States.

The bill was adopted unanimously at a plenary meeting of the House of Councilors, the upper chamber. The bill cleared the House of Representatives on Nov. 14.

The revised Foreign Exchange and Foreign Trade Act will require overseas investors to seek prior notification from the government before obtaining a 1 percent or higher stake in a listed Japanese firm engaged in business related to weapons, nuclear energy, semiconductors, railroads and other areas, lowering the threshold from the current 10 percent. The amended law is expected to take effect next spring.

The move is in step with measures by Europe and the United States to strengthen investment controls, amid growing concerns about possible leaks of sensitive information and critical technologies to other countries such as China.

But as part of the government’s efforts to avoid deterring direct investments in the country with the tighter rules, the amended law will exempt foreign investors from prior notification if they plan to buy stocks solely for asset management purposes.

Industries requiring prior notification by foreign investors also include utilities, broadcasting and telecommunications.

The amended law will require foreign stakeholders to give advance notice if they will influence management through measures such as dispatching board members and selling core businesses. If an investment is made without observing the rules, the government will be able to order a suspension or order the divestment of the shares.

Market participants have expressed concern that the criteria for exemption from prior notification remain obscure, and that the tighter rules could prompt capital flight from Japan.

They have also criticized a lack of clarity on how the new rules would be implemented and which investments would be subject to exemptions.

“The implementation of the new regulation as currently proposed could have a substantial negative impact on the Japanese stock market,” Goldman strategists including Kathy Matsui, a renowned voice in Japan’s markets, wrote in an Oct. 16 note. “There is a risk that the new regulations could deter foreign investor participation, causing a decline in market liquidity.”

To alleviate such worries the government plans to specify detailed rules, and present by early April a schedule of listed companies that will require prior notification in relation to foreign investments.

Under certain conditions, such as when investors do not become board members, the procedures are likely to be unnecessary.