Japan Strengthens Foreign Investment Oversight with New Divestment Powers

Enhanced National Security Measures

Japan is set to introduce significant changes to its foreign investment regulations, enabling authorities to retroactively order foreign investors to divest their holdings if they pose a risk to national security or the economy. This move represents a major shift in Japan's investment landscape, targeting particularly Chinese investors who have been increasingly active in the Japanese market ¹

Key Features of the Proposed Regulations

1. Retroactive Divestment Authority: The proposed law will allow authorities to review and potentially unwind investments made up to five years in the past.
2. Expanded Scope: The new regulations will cover not just direct investments but also indirect investments through foreign holding companies.
3. Stricter Review Process: While the current threshold for mandatory reporting is 1% ownership, the new rules will focus on high-risk investors, particularly those potentially linked to foreign intelligence gathering.
4. Alignment with International Standards: Japan aims to bring its investment screening process in line with countries like the US, UK, and Germany, which already possess similar retroactive divestment powers.

Market Impact and Expert Analysis

While the new regulations might seem restrictive, most experts believe they won't significantly impact overall M&A activity in Japan. Yohsuke Higashi, an M&A lawyer at Mori Hamada & Matsumoto, notes that "except for Chinese investors who might be categorized as high-risk, these changes won't generally deter M&A or other direct investments in Japanese companies." ¹

The Japanese government has been tightening its grip on foreign investments since 2017 when Chinese companies were required to cooperate with their country's intelligence agencies. This regulatory shift comes as Japan experiences record-high stock market activity and increased foreign investor interest following corporate governance reforms.

Economic and Strategic Implications

The new rules reflect Japan's balancing act between maintaining an open investment environment and protecting its economic security. While foreign investment inflows surged 45% to $33 billion last year according to LSEG data, the government is particularly concerned about strategic acquisitions by foreign entities.

As Nicholas Benes, founder of the Board Director Training Institute of Japan, observes, "Japan's intention is to prevent Chinese companies from acquiring Japan's best companies and technologies." ¹

The proposed changes represent a significant evolution in Japan's investment screening process, marking a more assertive approach to economic security while still maintaining an overall welcoming stance toward foreign investment.