The new Japan foreign investment rules were fully implemented on 7th June after a 30-day transition period. The amendments to the Foreign Exchange and Foreign Trade Act (FEFTA) require some overseas investors to submit a prior notification of stock purchases to the government via the Bank of Japan (BoJ).
1% Threshold
The amendments to the Foreign Exchange and Foreign Trade Act required some foreign investors to report in advance if they plan to acquire a stake of 1% or higher in companies in designated sectors. This is a huge fall from the previous threshold of 10%.
Depending on the type of investor and the sector investing into, investors may be subject to blanket exemptions to the 1% threshold or have higher prior notification thresholds of 10%.
Sectors
The Ministry of Finance has published a list of over 3000 companies of which 518 companies in 12 sectors are deemed important to Japan’s national security.
This list classifies listed companies in Japan into the following categories:
- Companies conducting business activities only in non-designated business sectors (subject to post-investment report only);
- Companies conducting business activities in designated business sectors other than core sectors; or
- Companies conducting business activities in core sectors
Exemptions
Although the threshold drop is quite significant, the market impact of the amendments may be relatively limited as the legislation includes a large number of exemptions.
Foreign financial institutions are eligible for a “blanket exemption” for the prior notification requirement. They will however still have to make the post investment report from 10%. Such foreign financial institutions include:
- Securities firms
- Banks
- Insurance companies
- Asset management companies
- Trust companies
- Registered investment companies (including mutual fund and exchange-traded fund)
- High-frequency traders
Additionally, Sovereign Wealth Funds (SWFs) and Public Pension Funds that are deemed to pose no risk to national security are eligible for the regular exemption if accredited by the authorities. Those investing in “designated business sectors other than core sectors” will have no prior notification limits, they will however, have a 1% post investment report.
SWFs and public pension funds investing in “core sectors” will have a prior notification thresholds of 10% and a post investment report threshold of 1%.
The following are the conditions which much be met in order for exemptions to apply:
Exemption Conditions
- Investors or their closely-related persons will not become board members of the investee company.
- Investors will not propose to the general shareholders meeting transfer or disposition of investee company’s business activities in the designated business sectors.
- Investors will not access non-public information about the investee company’s technology in relation with business activities in the designated business sectors.
Exemption Conditions on Core Sectorsʼ Business Activities
- Investors will not attend the investee companiesʼ executive board or committees that make important decisions in these activities.
- Investors will not make proposals, in a written form, to the executive board of the investee companies or board members requiring their responses and/or actions by certain deadlines.
Summary Table
| Type of Investors | Sector | Prior-notification of stock Purchases | Post-investment report |
|---|---|---|---|
| Eligible Foreign Financial Institutions | Designated business sectors with material implications for national security (Core) | Exemption | 10% |
| Other designated business sectors (non-core) | Exemption | 10% | |
| Companies conducting business activities only in non-designated business sectors (subject to post-investment report only) | N/A | 10% | |
| General investors (including SWFs and public pension funds accredited by the authorities) | Designated business sectors with material implications for national security (Core) | 10% | 1% |
| Other designated business sectors (non-core) | Exemption | 1% | |
| Companies conducting business activities only in non-designated business sectors (subject to post-investment report only) | N/A | 10% | |
| Investors with a record of sanction due to violation of the FEFTA State-owned enterprises (except those who are accredited by the authorities) | Designated business sectors with material implications for national security (Core) | 1% | 1% |
| Other designated business sectors (non-core) | 1% | 1% | |
| Companies conducting business activities only in non-designated business sectors (subject to post-investment report only) | N/A | 10% |
Although the market impact in this instance may be relatively limited depending on the type of investor, over the last few months we have seen that foreign investment restriction are on the rise with many countries introducing protective measures to address the disruption caused by COVID-19. With further developments expected, this highlights the need for investors to carefully consider foreign investment restrictions in relation to their portfolios.
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