Japan to Impose Tighter Restrictions on Foreign Investment

Companies subject to new limits . . . 

Japan’s Ministry of Finance announced a list of 518 firms that will be subject to stringent regulations in terms of inbound investment. The changes will take full effect on June 7. The new legislation requires investments to have prior approval from the government if a foreign investor gains even a one per cent share of a company in 12 strategic sectors, such as defence, utilities, and telecommunications. The previous legislation did not require any pre-screening unless foreign investors took a more than 10 per cent stake in strategic companies. Additionally, the ministry released another list of 1,584 companies that do not require pre-screening but do require the government to be notified. Amid the COVID-19 pandemic, Japan also plans to include pharmaceuticals and advanced medical equipment to its list of strategic sectors.

Why is Japan tightening foreign investment?

Japan’s move to impose tighter restrictions on foreign investment is not new: in 2017 and 2019, Japan tightened its national security review mechanisms for inbound investments to ensure control over critical sectors. The economic repercussions caused by the pandemic have also made many firms vulnerable to foreign acquisitions at cheaper prices, and Chinese firms have made moves to acquire assets around the world at discounted prices. In order to curb the ongoing wave of Chinese firms’ buyouts, Japan has made this move to protect its critical and strategic firms.

Global trend emerging around foreign investment . . .

Despite the G20’s commitment to keeping trade and investment open during the COVID-19 crisis, some other countries are placing restrictions on inbound investment. Japan’s stringent regulations on foreign investment follow similar steps taken by Australia, Canada, India, the U.S., and some European nations, allowing greater scrutiny by governments of foreign ownership in industries that are deemed critical to national security. As the pandemic continues to damage economies, de-globalization is accelerating, with tougher regulations on inbound investment becoming an increasingly popular tool.