Japan is beginning to open the door wider to foreign direct investment. The Justice Ministry has completed a skeleton draft of a new law that will make it easier for foreign companies to purchase Japanese ones. Japanese executives understandably fear that their companies might become targets for foreign takeovers.

Under current laws, buying out a company is a costly undertaking that requires purchasing a large amount of its stock. The proposed legislation, which is expected to take effect in 2006, will eliminate the need to achieve buyouts through equity swaps between the acquiring company and the company to be acquired. This rule will apply to both Japanese and foreign interests.

The government welcomes direct investment from abroad. Japanese corporate managers, however, are worried that lower barriers to buyouts could make their companies easy takeover targets for giant foreign companies or investment groups. A takeover bid may be difficult to deter, they say, if the market capitalization (share price multiplied by the number of shares) of a target corporation is relatively small.