The Diet has passed amendments to the Foreign Exchange and Foreign Trade Act, tightening the screening of investments in Japan by foreign investors and companies.
The revised law introduces new regulations on foreign investments that could raise concerns about the leakage of sensitive Japanese technologies. It also formalizes the creation of a panel similar to the US Committee on Foreign Investment in the United States (CFIUS), which the Takaichi administration seeks to establish as an interagency body for reviewing investments.
Balancing Openness and Security
Promoting foreign investment is essential to the growth-oriented investment strategy the government has emphasized. At the same time, foreign actors could potentially acquire stakes in Japanese companies to obtain technologies or information in ways that harm the national interest. Taking appropriate measures to address such risks is only natural.
Japan’s version of CFIUS will expand the existing foreign investment review system, which has been administered by the Ministry of Finance and the ministries responsible for overseeing relevant sectors. The panel is expected to be jointly chaired by the Ministry of Finance and the National Security Secretariat, with participation from organizations including the Ministry of Foreign Affairs and the Ministry of Defense. The revised law explicitly provides a legal basis for establishing this framework.
Expanded Scope of Review
Against the backdrop of China’s growing pursuit of regional and global influence, the importance of strengthening economic security has increased considerably. Fundamentally enhancing the review process for foreign investment in Japan is therefore a significant step. The government should move promptly to establish an effective system, including coordination with the National Intelligence Council, which is expected to be established soon.
Under the current system, foreign investors are generally subject to prior government review when they acquire shares above a specified threshold in companies operating in designated sectors related to national defense, critical infrastructure, and other sensitive areas.
The revised law expands regulation to cover cases in which a foreign company holding shares in a Japanese company is itself acquired by another overseas investor, treating such transactions as “indirect investments.” It also stipulates that domestic investors may be treated as foreign investors if they are under the influence or control of a foreign government or similar entity.
The key question is whether the review process will be effective. Japan’s screening system has relatively limited personnel and compares unfavorably with that of CFIUS in the United States. How to address this weakness remains an important issue.
Fairness and Transparency
In April, the government advised an Asian investment fund to abandon its planned acquisition of major machine-tool manufacturer Makino Milling Machine, citing national security concerns. If the review system is strengthened, similar recommendations may become more frequent.
The government must also ensure that the system is administered fairly, consistently, and transparently. While it is understandable that details of reviews involving sensitive security matters cannot be fully disclosed, any perception that national security regulations are being applied arbitrarily could undermine momentum for foreign investment in Japan.
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(Read the editorial in Japanese.)
Author: The Sankei Shimbun
