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Japan is planning to tighten scrutiny of foreign investment, emulating the US with a new body to strengthen economic security that overseas companies and activist investors hope will streamline a complicated vetting process.
Prime Minister Sanae Takaichi last week unveiled plans for a sweeping overhaul of Japan’s foreign investment screening system, which has long been accused of entangling buyout bids in months of paperwork.
The new agency will be modelled on the Committee of Foreign Investment in the United States, which vets overseas investments for national security risks. The committee was central to former US president Joe Biden’s attempt in 2024 to block Nippon Steel’s acquisition of US Steel.
Takaichi’s push to establish what she called a “Japanese version of Cfius” is one of the prime minister’s major policy priorities after her landslide election win this month, alongside government-led stimulus and tax and budget reforms.
It comes amid heightened concern in Japan about rising activist investor interest and the need to protect sensitive sectors and technologies from potentially harmful foreign interference, particularly from China.
It also fits closely with Takaichi’s brand of nationalist populism, according to political analysts, as she seeks to project herself to voters and coalition allies as a muscular defender of Japan’s national interests.
Takaichi directly linked the move to her plans to establish a new national security agency, which will consolidate and strengthen intelligence and information gathering. A Japanese Cfius would “strengthen the security screening system for foreign investment”, she said.
Legal and financial experts said that while that it remained unclear whether the new body would lead to a significant number of deals being blocked, a more streamlined process would be welcome to many foreign investors, who have called for more efficiency and transparency.
The current system, under the Foreign Exchange and Foreign Trade Act (FEFTA), is broadly overseen by the finance ministry. In practice, screening responsibilities are spread among the trade ministry, Financial Services Agency, Bank of Japan and the ministry overseeing the sector in which the target company operates.
The result is a process that is time-consuming, difficult to navigate and prone to inconsistencies and delays, according to lawyers, bankers and fund managers.
“There is a high noise to signal ratio in the current system,” said Nels Hansen, a partner at law firm White & Case in Tokyo. “The government agencies that have to vet the investments are often overwhelmed.”
That system has come under increasing strain in recent years as corporate Japan has seen a surge of interest from global corporations and activist hedge funds targeting companies they see as undervalued.
Some buyout bids have run into national security concerns. Taiwanese components maker Yageo’s hostile $465mn takeover of Japanese rival Shibaura Electronics was ultimately cleared last year, despite initial questions over the buyer’s links to China.
Meanwhile, Seven & i Holdings, Japan’s biggest convenience store chain, tried to deflect Canada’s Alimentation Couche-Tard’s ultimately unsuccessful $46bn bid — which would have been the country’s biggest foreign takeover — in part by arguing that its network was part of national disaster response efforts.
Japan previously strengthened FEFTA under pressure from the US during Donald Trump’s first administration and in response to rising overseas Chinese investment in critical sectors. In 2019, it significantly lowered the threshold at which foreign investors were obliged to notify authorities before buying stakes in listed Japanese companies in designated industries.
The same reform also widened the definition of sensitive industries, and offered exemptions if investors refrained from proposing strategic changes to companies.
Although Takaichi has yet to set out the exact shape of the new agency, senior officials said that it would be likely to take the form of a single committee to co-ordinate and streamline the process.
The changes could have far-reaching consequences for how foreign investors approach Japan.
“Investors think the current rules are very opaque and while non-Japanese investors are not explicitly prohibited, there is a sense of unspoken rules needing to be maintained,” said Todd Kropp, a partner at KPMG in Tokyo.
In a report, law firm Mori Hamada said some of the proposed measures included exempting “lower-risk categories of investment” from the prior notification requirement.
However, it added that the categories requiring notification could be widened, as there were concerns about whether “investments in Japanese companies holding important technologies or information are adequately captured” by the current system.
A centralised system could in theory be more consistent, said M&A lawyers, but they added as with Cfius, it would also grant the prime minister’s office veto authority over takeovers.
“If they change to something closer to Cfius in the US, it could mean having a more regularised and centralised process,” said Jeremy White at Morrison Foerster, a law firm in Tokyo. “Cfius may have its issues, but it is transparent and investors know how to get through the process or not.”
