Foreign direct investment in Japan

FDI rules in Japan are included in the Foreign Exchange and Foreign Trade Act (FEFTA) and related ministerial ordinances.

There have been several amendments regarding FDI in recent years. The latest amendment came into effect on 7 June 2020 and is aimed at strengthening investment restrictions in certain risk areas while also allowing flexible arrangements for investments which promote healthy economic development.

Read more from our 2023 foreign direct investment report

• Foreign direct investment in Australia
• Foreign direct investment in China
• Foreign direct investment in Germany
• Foreign direct investment in India
• Foreign direct investment in Ireland
• Foreign direct investment in Luxembourg
• Foreign direct investment in the Netherlands
• Foreign direct investment in Singapore
• Foreign direct investment in Spain
• Foreign direct investment in the UAE
• Foreign direct investment in the UK
• Foreign direct investment in the US

The June 2020 amendments

Key changes enacted in 2020 included:

• in the past, only acquisitions of shares of a listed company amounting to 10% or more were subject to foreign investment restrictions. The threshold was decreased to 1%. Shares of a non-listed company continue to be subject to foreign investment restrictions regardless of the shareholding ratio;
• exemptions from prior notification were enacted for certain acquisitions of shares. Industry sectors subject to prior notification were divided into ‘core business’ and ‘non-core business’. Depending on the category, prior notification is exempted by satisfying certain requirements;
• items specifying the term ‘investment’, which triggers foreign investment restrictions, were added, for example when a ‘foreign investor’ agrees that itself or ‘closely related person’ is appointed as a director or auditor of a company at a shareholders’ meeting; and
• the definition of ‘foreign investor’ was expanded to include companies owned by foreign entities and their subsidiaries, defined under the Company Act.

Japan broadened the industry sectors which are subject to prior notification in 2019, but has narrowed this definition again. Software businesses, information management services or internet use support services which are non-core businesses within a company group are excluded from the sectors subject to prior notification. However, in recent years, the manufacturing of pharmaceuticals for infections or highly controlled medical devices and metal mining regarding certain important mineral resources have been added to the sectors subject to prior notification.

Japan's Ministry of Finance has prepared a list of classifications of listed companies subject to FDI prior notification requirements under the FEFTA. This list classifies, for the purpose of reference, listed companies in Japan into:

• companies conducting activities only in non-designated business sectors (subject to post-investment report only);
• companies conducting activities in designated business sectors other than core sectors (subject to prior notification in general); and
• the companies conducting activities in core sectors (requirements for exemption from prior notification more limited than above).

Japan’s FDI rules

Direct investment into Japan by a foreign investor can be subject to prior notification or post-closing reporting requirements to the Japanese government, unless one of the exemptions applies.

Prior notification is required for industry sectors concerning national security, public order or certain regulated industries. Other direct investments are subject to only post-closing report requirements, which require a simplified procedure.

Foreign investors

Under FEFTA, ‘foreign investor’ means:

• any non-Japanese resident individual;
• companies incorporated under a law other than Japanese law, or with their principal office outside Japan (including the Japanese branches of such companies);
• companies in which at least one of the above holds 50% or more of the shares, as well as companies which are owned by at least one of the above;
• partnerships which carry on investment business, or investment limited partnerships, in which at least one of the above (or partnerships falling under foreign investors) holds 50% or more of the equity interest, as well as companies which are owned by at least one of the above (or partnerships falling under foreign investors), or in which 50% or more of the managing partners are above or partnerships falling under foreign investors; or
• companies in which the majority of officers are non-Japanese resident individuals.

In addition, a Japanese entity or individual acting on behalf of a foreign investor may be also identified as a foreign investor.

Direct investment

The definition of direct investment under FEFTA includes:

• acquisitions by a foreign investor of 1% or more shares in a Japanese listed company;
• acquisitions by a foreign investor of 1% or more voting rights in a Japanese listed company;
• acquisitions by a foreign investor of any amount of shares in an unlisted company;
• the establishment of a branch, factory or any place of business in Japan (except for a liaison office) by a foreign investor who is a non-resident individual or a foreign company; or
• loans made by a foreign investor to a Japanese company for a period exceeding one year that exceed JPY 100 million, or constitutes 50% of the outstanding debts of the lender Japanese company in aggregation.

These thresholds are calculated by combining the foreign investor and certain individuals or entities under the same control. The approval of the majority foreign shareholder of corporate actions such as a change of the company's purpose are also regarded as direct investment and may require the same prior notification or post-closing report requirements.

Prior notification

A foreign investor has to file a prior notification for governmental screening if its direct investment falls under one of the following categories:

• the target company operates in regulated industry sectors concerning sensitive national security interests, public order or national economy, such as the manufacturing of weapons, aircraft, satellites, rockets, nuclear reactors, nuclear source material or nuclear fuel material, and development of programmes within these sectors;
• the target is involved in the manufacturing of advanced technology materials, machines, tools, and electronic devices, with a high probability of conversion to conventional weapons;
• the target is involved in the manufacturing of pharmaceuticals for infections or manufacturing of highly controlled medical devices;
• the target mines certain important mineral resources;
• the target is in one of the electricity, gas, communications, broadcasting, transportation, biological drugs, agriculture, forestry, fishery, and oil sectors;
• the investment is to be made by a foreign investor whose home country is not on the list of 163 permitted countries or areas; or
• the foreign investor is related to Iran.

Prior notification must be filed not earlier than six months before the targeted completion of the transaction by the foreign investor to the Japanese Ministry of Finance, as well as the ministry which controls the relevant industry sector. This notification will be made through the Bank of Japan.

Upon notification, the government will determine if the foreign investment is considered a risk for national security, disturb the maintenance of public order, hinder the protection of public safety, or cause a significant adverse effect to the smooth management of the Japanese economy.

In principle, the government has 30 days to reach a final decision regarding a foreign investment. The foreign investor may not close the transaction during this waiting period. This period may in unproblematic cases be shortened to two weeks. In cases where it is determined that this period can be shortened from the viewpoint of national security, the government should endeavour to make efforts to shorten this period to four business days.

On the other hand, the government can extend the waiting period up to four months if it requires more time for a thorough investigation of the foreign investment. Until the government has reached a decision regarding investment, the transaction must remain on hold and cannot be completed.

Once the transaction is closed, the foreign investor must report to the Ministry of Finance and the relevant ministry for its sector through the Bank of Japan within 45 days.

Post-closing report

FDI that is not subject to the prior notification requirement will still require a post-closing report to the Bank of Japan, unless it falls under certain safe harbour categories.

The post-closing report must be filed within 45 days after the completion of the foreign investment transaction is takes place.

Exemptions from notification or reporting requirements

FDI will not require either prior notification or post-closing report, for example, if the foreign investor acquires:

• shares by way of a succession at will or intestacy;
• before the company is listed, provided that the shareholding will not reach 10%; or
• shares in non-listed companies (not subject to the prior notification) for the shareholding of less than 10%.

Other reporting obligations under FEFTA

Apart from the prior notification and post-closing report in relation to a foreign investment, the foreign investor may need to file a periodical report of capital transaction and/or report of payment/receipt of payment in certain situations.

Legal consequences

If the government concludes that the FDI is likely to establish one of the above-described risks, it will propose a restructuring of or prohibit the foreign investment transaction in the form of a ‘recommendation’ to cease or modify the transaction in question. The foreign investor may only proceed with the transaction if it follows governmental recommendation. If the foreign investor does not follow the governmental recommendation, the government may then issue a formal order to cease or modify the transaction.

If the foreign investor failed to make a prior notification, closed the deal before completing the waiting period, made any misrepresentation in the prior notification, or does not follow the governmental order, the government may enforce "necessary measures" to rectify the situation. Noncompliance with this enforcement may result in criminal charges including imprisonment of not more than three years and/or a fine of not more than JPY 1 million or three times as large as the amount of the investment, whichever is higher.

Haruka Murata and Daichi Ito are corporate law experts at Miura & Partners.