Out-Law Guide 7 min. read
07 Jun 2023, 5:20 pm
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.
Key changes enacted in 2020 included:
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.
Partner, Miura & Partners
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:
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.
Under FEFTA, ‘foreign investor’ means:
In addition, a Japanese entity or individual acting on behalf of a foreign investor may be also identified as a foreign investor.
The definition of direct investment under FEFTA includes:
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.
A foreign investor has to file a prior notification for governmental screening if its direct investment falls under one of the following categories:
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.
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.
FDI will not require either prior notification or post-closing report, for example, if the foreign investor acquires:
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.
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.