Business / Financial Markets | the Argument: foreign investment

Will tighter foreign exchange law make Japan secure?

The Argument is a feature dedicated to promoting dialogue and deeper understanding of contentious issues by introducing various viewpoints.

Abenomics has reportedly won praise abroad, but a security bill passed by the Diet last month has dampened confidence in global financial markets about the outlook for Japan.

In December, the Diet passed a revision of the Foreign Exchange and Foreign Trade Act that requires foreign investors to notify authorities when acquiring stakes of 1 percent or more in listed companies whose business is related to national security. The current threshold is 10 percent.

The government says the revision, set to take effect this spring, was made to protect Japanese businesses, information and technologies vital to national security — emulating similar steps taken by the United States and Europe to guard against China.

But foreign investors have complained the 1 percent rule is draconian and will increase operating costs. They also argue that it’s an attempt to shut out activist investors, saying it will slow investment and work against recent policy moves taken to strengthen corporate governance.

The Finance Ministry has sought to ease such concerns by setting exemptions. For example, investors won’t have to submit a report in advance if they want to buy stocks solely for asset-management purposes.

Tokyo is seen to be echoing similar steps taken by Washington and Germany.

In August 2008, the U.S. enacted a law to lay down rigid rules on foreign investment in companies that deal in information and technologies related to national security, also requiring prior notification.

Germany lowered its threshold for reporting foreign investments to the government to 10 percent from 25 percent in 2018.

In Japan’s case, the designated security sectors include defense, aviation, nuclear power, cybersecurity, and manufacturing involving any product that can be used for military purposes. But it is still unclear which firms will be subject to the rule.

The ministry plans to prepare a list of the firms requiring prior notification before the law takes effect in April. It says 1 percent was chosen as such a stake typically lets investors make proposals at shareholders meetings.

Are the tighter controls a sensible policy for strengthening national security or an insular one that will drive away investment?

Is Japan’s national security best served by new curbs on global investors? by Jesper Koll

Tightening of rules on foreign investment in Japan long overdue by J. Berkshire Miller