July 20, 2020
Yuki Sato
Joerg Schmidt

THE LATEST AMENDMENTS OF THE FOREIGNEXCHANGE AND FOREIGN TRADE ACT
Earlier last year, the Japanese government started to tighten the rules on foreign direct investments(FDI) by adding, among others, certain sectors in the information and communication technology andsoftware development to the list of restricted industries. Foreign investments in companies thatoperate in these sectors are generally subject to pre-transactional approval by the relevant authorities
if they exceed certain thresholds. With the latest amendments, the legislator lowered the thresholdfor the acquisition of shares in listed companies from 10% to 1%. At the same time, exemptions wereintroduced allowing foreign investors under certain conditions to buy shares above these thresholds
without obtaining prior approval.
The changes entered into force on May 8, 2020 and apply to all investments on or after June 7, 2020.
1.

The Foreign Exchange and Foreign Trade Act
The Foreign Exchange and Foreign Trade Act (Act) aims “to enable the proper development forforeign transactions and the maintenance of peace and security in Japan”. To ensure that thesegoals are achieved, the Act limits among others foreign investments in sectors which are vital tonational security (e.g. infrastructure, aviation, nuclear technology).
Only in 2019, the legislator added the ICT industry, etc. to the list of restricted sectors. The movereflected the increasing importance of those industries in a national security context and waslargely in line with developments in other jurisdictions.
This time, the legislator extended the definition of foreign investors and lowered the thresholdfor investments in listed companies irrespective of their industry. At the same time, someexemptions to the pre-transactional approval requirement were introduced for certain types ofinvestors.

2.

Foreign Investors
The Act defines foreign investors as (i) individuals who are non-residents, (ii) entities establishedunder foreign laws or having their principal office in a foreign state, (iii) Japanese entities which
are directly/indirectly controlled by persons set forth in item (i) and (ii), and (iv) entities in which
the majority of directors are persons set forth in item (i). A person is considered to control anentity within the meaning of item (iii) if it holds 50% or more of the voting rights in a company.
1Whether the voting rights are held directly or through other entities controlled by the respective
person is irrelevant.
With the latest amendment (iv) partnership-type investment funds were added to the definitionof foreign investors provided, however, 50% or more of the total capital of the fund wascontributed by persons indicated under item (i) and (ii) above.
3.

Investment or Equivalent Action
The term “inward direct investment or equivalent action” is defined broadly. It includes (i) theacquisition of shares (both on primary and secondary markets), (ii) consenting to certain
substantial changes to a company’s scope of business after the acquisition of the shares, (iii) theestablishment of a branch offices, (iv) the issuance of loans of at least JPY 100 million and a termof one or more years 1 , and (v) the succession of business by means of business transfer,absorption type company split or merger.
The acquisition of shares in a listed company is only considered a direct investment under theAct if the investor holds at least 1% of the outstanding shares or voting rights following thetransaction. Whether the investor holds the shares or voting rights directly or through closelyrelated persons is irrelevant. The definition of closely related persons is rather complex. At its
core, it includes affiliates and business partners of a foreign investor where the investor is acompany, and relatives of the investor if the investor is a natural person.

4.

Designated Business Sectors
Out of the 1465 sectors under the Japan Standard Industrial Classification 155 sectors aredesignated business sectors under the regulations. As discussed in more detail in section 5 below,
foreign direct investments into designated business sectors may trigger pre-transactional
approval requirements.
The regulations further distinguish between core-designated sectors and non-core sectors.
While some industries belong exclusively to core or non-core designated sectors, others may becovered by both.
Listed Companies: The Ministry of Finance (MoF) published an exhaustive list indicating for all
listed companies in Japan, whether their activities fall within non-designated sectors, designatedsectors other than core sectors, or core sectors. The full list can be found on the website of theMoF.
Unlisted Companies: For unlisted and private companies, it is necessary to assess in each casewhether the relevant business falls within the designated sectors – and if so under the non-core
or core sector – as different notification requirements apply for exempted investors. The full listof designated sectors can be found on the website of the MoF as well (only Japanese).2

1 Loans issued by banks and other financial institutions in the course of trade are explicitly excluded from the definition.
2 To see all items please visit https://www.mof.go.jp/international_policy/gaitame_kawase/fdi/publicnotice1-1.pdf,

https://www.mof.go.jp/international_policy/gaitame_kawase/fdi/publicnotice1-2.pdf,https://www.mof.go.jp/25.

Pre-transactional approval
Foreign investments in companies operating in designated sectors are generally subject to pretransactional approval by the relevant authorities via the Bank of Japan (BoJ). For listedcompanies, the approval requirement is triggered when an investor holds 1% of the outstanding
shares or voting rights subsequent to the investment either on his own or together with closely
related persons.
For unlisted companies there are no thresholds. Investments in companies operating in thedesignated sectors are therefore subject to BoJ approval irrespective of the amount invested
and the shares or voting rights held following to the investment.

thresholdlisted companies

1%

non-listed companies

n/a

Investors who fail to obtain pre-transactional approval by the BoJ may be ordered to dispose of
all acquired shares.
6.

Exemptions
The new regulations provide for exemptions from the pre-transactional approval requirement
for certain types of investors but only if these investors meet additional criteria.

6.1. Blanket Exemption
The blanket exemption is available to foreign financial institutions which are subject to Japanese
regulations or equivalent foreign regulations. The definition includes, banks, securities firms,insurance companies, asset management companies, trust companies, registered investmentcompanies, as well as high-frequency traders3.
In order to qualify for the blanket exemption these entities or closely related persons must(a) not become board members of the investee company(b) not propose at a general shareholders’ meeting the transfer or disposition of the investee
company’s business in the designated sector(s)(c) not gain access to non-public information about the investee company’s technology
concerning the designated sectors.
Financial institutions complying with these requirements do not have to obtain pre-transactional
approval via the BoJ. This applies irrespective of whether the investee company operates in core
or non-core designated sectors and irrespective of the number of shares or voting rights heldinternational_policy/gaitame_kawase/fdi/publicnotice1-3.pdf, https://www.mof.go.jp/international_policy/gaitame_kawase/fdi/index.htm#joubun (accessed 20/07/2020).
3 High-frequency traders are only eligible for the blanket exemption if they are registered with the Financial Services
Agency.

3following the investment.
If an exempted investor holds 10% or more of the shares or voting rights following theinvestment, it must however file a post-investment report with the BoJ.
6.2. Exemption for General Investors
Exemptions from the pre-transactional approval also apply to general investors (including
sovereign wealth funds and public pension funds accredited by authorities). In contrast to theblanket exemption, it is necessary to distinguish between investments in companies operating
in designated core sectors and companies operating in non-core sectors.
Non-core sectors: Investments in non-core sectors are exempted if the investor meets all therequirements under item (a) to (c) in section 6.1 above. It is however necessary to file a postinvestment report, if the investor holds 1% of the shares or voting rights following the investment.
Core sectors: Investments in core sectors may only be exempted if the investor does not hold
10% or more of the shares or voting rights subsequent to the investment. In order to qualify forthe exemption an investor must comply with the requirements under item (a) to (c) in section
6.1 above and must(d) not attend the investee company’s executive board or committees that make important
decisions on activities in the core sector(e) not make any proposals in writing to the executive board or board members requiring their
responses and/or actions by certain deadlines.
A post-investment report must also be filed in these cases provided the investor holds 1% ormore of the shares 4or voting rights following the investment.
Please note that a foreign investor is not required to obtain a pre-transactional approval if acompany has only indicated restricted activities in its corporate documents (e.g. articles ofincorporation, corporate registry) but has not operated in these sectors within 6 months prior to
the investment. Even in this case, the foreign investor must however submit a post-investment
report if he holds 10% or more of the voting rights of the investee company.

4 Please note that the foreign investor will have to submit (i) a report after the investor holds 3% or more of the sharesor voting rights following the investment and (ii) a report for each acquisition after the investor holds 10% or more of
the shares or voting rights following the investment.

4

Graphic 1: Overview of pre-notification for share purchases and post-investment report requirements
for listed companies. Please note that Box 1 is identical with item (a) – (c) in section 6.1 above andBox 2 with item (d)-(e) in section 6.2.5.6

Graphic 2: Overview of pre-notification for share purchases and post-investment report requirements
for unlisted companies. Please note that Box 1 is identical with item (a) – (c) in section 6.1 above.

5

MOF, Rules and Regulations of the Foreign Exchange and Foreign Trade Act, p. 16 retrieved fromhttps://www.mof.go.jp/english/international_policy/fdi/kanrenshiryou01_20200424.pdf (accessed 20/07/2020).
6 Ibid, p. 17.

5

7.

Filing process
Investments that require pre-transactional approval must be notified to the BoJ before theinvestment is made. The notification must specify the purpose of the investment, the amount,the time and other information as specified by Cabinet Order. Once the notification is submitted,
there is a 30-day waiting period during which the investment must not be executed. In practicethe waiting period is generally shortened to 2 weeks. Under certain circumstances, the waiting
period may, however, also be extended to a maximum of five months. To avoid unnecessary
delays, foreign investors should engage in informal discussions with the relevant authorities prior
to filing the notification.
Post-investment reports mainly serve statistical purposes and must be filed within 45 days after
the respective investment is made.

8.

Conclusion
Whether the latest amendments negatively affect the readiness of foreign investors to invest inJapanese companies remains to be seen. Given the newly implemented exemptions under theAct, it should however not hamper foreign investment unreasonably.
In any case, investors are well advised to check early whether their investments require pretransaction approval by the BoJ and if so whether they are exempted. For listed companies thiscan be checked easily. For unlisted companies, it is necessary to assess in more detail whether
the company falls under the designated sectors.
Please feel free to contact us if you have any questions in that regard and should you need ourassistance.

6