Japan’s main statute that governs foreign investments is the Foreign Exchange and Foreign Trade Act (“FEFTA”). FEFTA is the core framework governing foreign direct investment into Japan and establishes both filing requirements and government review mechanisms. Under FEFTA, regulated foreign investments are referred to as “inward direct investments”. Unlike many jurisdictions, Japan’s foreign investment rules can apply to transactions of any size and in a wide range of situations.
FEFTA regulates investments made by “foreign investors,” a category that includes non‑residents of Japan and Japanese entities that are controlled by foreign persons or foreign entities.[1] Recent revisions have introduced enhanced scrutiny for certain investors, including organizations or individuals who are obliged to cooperate with foreign governments in collecting information related to Japan’s national security under foreign laws, regulations, or agreements.
FEFTA subjects Foreign Investors to a screening process when they make an “inward direct investment or an equivalent action”, which encompasses a wide range of situations. In practice, the definition of “inward direct investment” is broader than many foreign investors expect. It includes, among other things:
This list is not exhaustive, and seemingly indirect actions (such as changes in internal governance arrangements) can also trigger filing obligations.
In short, there are a variety of actions which can trigger notification requirements, including the acquisition of even a single share of an unlisted company, making long term loans, and changing the management structure of a company. As for the acquisition of equity of listed companies, there is a 1% threshold and there are exemptions available.
FEFTA establishes two distinct compliance pathways:
(i) pre‑investment notification and review,[3] and
(ii) post‑investment only reporting obligations[4].
In simple terms, some investments require notification before they are made, and generally all investments must be reported after completion (typically within 45 days).
Whether a pre-investment report is required depends on the investor’s status, the nature of the transaction, and the business activities of the target company.
FEFTA classifies listed companies in Japan into three categories based on the sensitivities of their business activities.:
How a target investment falls into one of these sectors affects the notification and review requirements. Companies engaged in certain Core Sector business activities (commonly referred to in practice as “Designated Core Business Entities”) are subject to significantly more restrictive exemption rules, including cases in which no prior‑notification exemption is available.[5]
Designated Sectors are business sectors that have been designated as important for national security and public welfare. These include, among others, broadcasting, public transportation, biological chemicals, security services, agriculture, forestry, fisheries, leather manufacture, and air and maritime transportation companies.
Also Read: Acquiring a Japanese Manufacturer: Legal Roadmap for Foreign Buyers
Core Sectors are a subset of Designated Sectors that are considered highly important to protect national security. These include all weapons, aircraft, nuclear facilities, space, and dual-use technologies companies, and critical businesses in the following sectors: cybersecurity, electricity, gas, telecommunications, water supply, railway, and oil (of these, those not being considered part of the Core Sector still fall under the Designated Sector rules).
Designated Core Business Entities are specific companies which are part of the Core Sector category and are also designated as “Specified Essential Infrastructure Service Providers”under the Economic Security Promotion Act.
Inward direct investments to Designated Sectors and Core Sectors are generally differentiated by the notification exemptions that are available to investors. In general, many investors who comply with exemption conditions may proceed without prior notification. On the other hand, except in limited cases (primarily for regulated financial institutional investors, and subject to additional conditions and investor classification), inward direct investment to Core Sectors is generally only exempt from prior-notification when the investment is less than 10%, and additional conditions apply.
In general, inward direct investment to Designated Sectors and Core Sectors is subject to prior-notification for screening. This screening examines whether the investment could pose risks to national security.
To promote investment conducive to sound economic growth, foreign investment into Designated Sectors which complies with certain conditions are exempt from prior-notification requirement. These conditions include, for example, restrictions on investors or closely-related persons becoming board members of the company receiving investment or accessing sensitive non‑public technical or operational information.
Subject to these conditions, foreign financial institutions are generally exempt from prior notification for both investments into Designated Sectors and Core Sectors (subject to regulations/supervisions under financial regulatory laws in Japan or other jurisdictions).
In general, investors other than financial institutions may also be exempted from prior-notification requirements for inward direct investments to Core Sector businesses. However, this does not apply for investments of 10% or more, and there are additional exemption conditions that apply.
In general, these exemptions are not available for investors with a history of violating FEFTA, state owned enterprises and foreign governments, and “investors obliged to cooperate with foreign governments in collecting information related to Japan’s national security based on agreements with foreign governments or laws and regulations” (so-called “Type A investors”). Importantly, exemption eligibility is highly fact‑specific and can change depending on both the investor’s profile and the target company’s activities.
In addition, another new “Type B” category of investors and “Designated Core Business Entities” category of businesses was identified for the purpose of catching investors which technically do not fall under Type A, but are substantively similar. Type B investors may avail themselves of prior-notification exemptions, but with additional conditions required for investments into Core Sector businesses and no exemption available for Designated Core Business Entities.
Note that this impacts financial institutions which have been able to rely on the blanket prior exemption system. Even foreign financial institutions which are considered Type A investors will be prohibited from using this scheme, and those considered Type B investors will have only limited use.
Type A investors are “organizations or individuals who have obligations to cooperate with foreign governments in collecting information related to Japan’s national security based on agreements with foreign governments or foreign laws and regulations,” or organizations controlled by such organizations or individuals.
To prevent circumvention of the Type A investor rules, Type B investors may be treated as those who don’t fall under Type A investor rules, but nevertheless their “substantive decision-making is controlled by” Type A investors or their “substantive headquarters” are located in jurisdictions other than their place of incorporation and they are subject to obligations to collect information.
In other words, the Type B investor rule may apply a wide net to catch those who don’t technically fall under the Type A investor rule but nevertheless are substantially under similar obligations.
FEFTA does not rely on monetary thresholds to determine whether a filing or approval is required for inward direct investments. Instead, filing requirements are triggered by the nature of the investment, the investor’s status, and whether the target operates in a designated / core sector. The acquisition of 1% of the equity of a listed company can trigger reporting requirements, and the acquisition of even a single share of an unlisted company can trigger reporting requirements.
By contrast, certain reporting obligations under FEFTA (such as cross‑border payment reporting) do include a ¥30 million threshold, but these are separate from the inward direct investment regime.
In short, for investors who are acquiring control or substantial influence over a company, the amount usually does not matter.
Under FEFTA, failure to comply can result in serious consequences, including orders to unwind all or part of a completed investment, requirements to take corrective action, monetary fines, and in some cases criminal penalties, including imprisonment. These measures are discretionary and applied depending on the nature and severity of the violation. These consequences underscore why early analysis under FEFTA is critical—particularly for investors accustomed to different regimes.
Canada’s Investment Canada Act (“ICA”) governs certain investments in Canada by non‑Canadians. Similar to FEFTA, ICA seeks to ensure that large foreign investments provide economic benefits to Canada, while allowing the government to review investments of any size that may pose national security concerns. [6] Both FEFTA and the ICA therefore seek to balance openness to foreign investment with the protection of economic and national security interests, though they do so using very different regulatory frameworks.
FEFTA regulates non‑residents of Japan, Japanese entities that are controlled by foreign persons or foreign entities, and persons obligated to collect information about Japanese national security. The ICA, by contrast, applies to investments by non‑Canadians, a concept that is primarily based on nationality and control rather than residence. [7] Thus, while the ICA is largely focused on nationality and control, FEFTA focuses on residence and the presence of foreign influence.
FEFTA sets up categories of business sectors and investors, and applies national security review based on whether the investor and investment target fall under those categories. By contrast, the ICA allows the federal government to conduct a national security review of any foreign investment, regardless of value or whether it otherwise triggers mandatory filing requirements.[8]
Similar to FEFTA, the ICA also provides for significant remedies (including orders to divest or not move forward with investment) and monetary penalties (up to $25,000 CAD per day) for non‑compliance.[9]
Summary
Japan’s FEFTA regime is distinguished by its strict and wide‑ranging reporting requirements. FEFTA can require notification for acquisitions as small as one percent of the voting rights of listed companies in designated sectors, and in some cases applies to any acquisition of shares in an unlisted company.
Japan’s FEFTA framework may seem similar to foreign investment regimes in other countries (such as Canada’s ICA), but investors should not assume that similar transactions will be treated the same way, and careful, early analysis under FEFTA is essential when planning investments into Japan.
[1] Article 26(1) of FEFTA.
[2] Article 26(2) of FEFTA.
[3] Article 27 of FEFTA.
[4] Article 55-8 of FEFTA, Section 7 of Cabinet Order 6-5.
[5] The Ministry of Finance maintains a database of over 4000 companies and which category they fall under. Click Here
[6] Section 2 of the ICA.
[7] Sections 2, 11 of the ICA.
[8] Section 25 of the ICA.
[9] Section 39 of the ICA.