Recent Changes in FDI Regulation in Japan – Commentary

introduction
Overview of FDI regulations in Japan
FEFTA Amendments and Related Public Notice through 2020
2021 amendment to the related public notice
Comment

introduction

When a non-Japanese company or investor conducts a merger and acquisition transaction in Japan, one of the most important regulations is the Foreign Exchange and Foreign Trade Law (FEFTA), which regulates foreign direct investment. (IDE) in Japan. The FEFTA has recently been amended and a related public notice has been issued (for more details, please see “M&A Planning: Practical Considerations Regarding FDI”).

On October 5, 2021, the related public notice was amended and the scope of the types of activities specified under FEFTA was extended. This article presents the latest change for the specified business types.

Overview of FDI regulations in Japan

When a foreign investor makes inbound direct investments under FEFTA (for example, a business transfer, merger, business split or certain types of share transfers), they usually have to submit a prior notification or subsequent report to the authorities. Prior notification under FEFTA is generally required if:

  • the foreign investor is not a national of a country designated under FEFTA;
  • the target business is a type of business specified under FEFTA; Where
  • the proposed transaction concerns Iran.

In many cases, the main question is whether a target’s business constitutes a specified type of business, which can be difficult and time consuming to determine.

FEFTA Amendments and Related Public Notice through 2020

In recent years, the government has made several changes to FEFTA and the related public notice. The schedule of recent major changes up to 2020 is as follows:

  • May 27, 2019 – the related public notice has been amended and the scope of the specified business types has been expanded to include information processing related businesses (including several types of software businesses) and related businesses information communication services;
  • November 29, 2019 – FEFTA has been amended to broaden the definition of “inward direct investment”; and
  • June 15, 2020 – the related public notice has been amended and the scope of the specified business types has been expanded to include certain types of pharmaceutical and medical device manufacturing businesses.

The above changes have broadened the scope of the subject matter of prior notification under FEFTA.

2021 amendment to the related public notice

On October 5, 2021, the corresponding public notice was amended and the scope of the specified activity types was again increased.

The following business types have been added to the specified business types:

  • metal mining companies (including the operation of resource survey vessels and surveying), manufacturing companies, repair companies and software companies related to equipment used for the purposes of metal mining companies (p., and mineral composition analysis activities relating to 34 types of important mineral resources such as rare earths (1); and
  • construction companies related to port and harbor facilities on specified remote islands(2) to allow the proper functioning of vessels exploring important mineral resources.

The government explains that this amendment is necessary in order to ensure a stable supply of critical mineral resources such as rare earths and to overcome supply chain vulnerabilities, which are an important issue for economic security in Japan. The second type of business listed above has been added in order to enable the smooth operation of vessels carrying out surveys of significant mineral resources.

This amendment applies to transactions from November 4, 2021.

Comment

FDI regulations have changed frequently in recent years. Here is the timeline of recent changes:(3)

  • 2002 – partial modifications of FEFTA:
    • in response to the terrorist attacks in the United States, to strengthen countermeasures against the financing of terrorism, in particular by making mandatory the provisions relating to the effort relating to identification (applied on 6 January 2003); and
    • improvement of the provisions which serve as a basis for the provision of information by the ministries and agencies concerned (entered into force on 7 May 2002);
  • 2003 – partial amendment to the FEFTA, which allowed the imposition of restrictions on payments, capital transactions, service transactions and import / export transactions of goods on the basis of a cabinet decision when this is specifically necessary for the maintenance of the peace and security of Japan (applied February 26, 2004);
  • 2017 – partial modifications of FEFTA (entered into force on October 1, 2017), which tightened regulations on direct inward investment, including:
    • the establishment of a system to order foreign investors who have made inbound direct investments without notification to sell their shares with respect to investments related to national security; and
    • submit the action of foreign investors who have acquired unlisted shares from other foreign investors to the prior notification regime with review;
  • 2019 – partial modifications of FEFTA, as indicated above;
  • 2020 – amendment of the related public notice, as indicated above; and
  • 2021 – amendment of the related public notice, as noted above.

Non-Japanese companies or investors conducting M&A transactions in Japan should keep an eye out for changes to FEFTA and related public notice below.

For more information on this topic, please contact Katsuki Matsuura to City-Yuwa Partners by phone (+81 3 6212 5500) or by email ([email protected]). The City-Yuwa Partners website can be accessed at www.city-yuwa.com.

End Notes

(1) Manganese Ore, Nickel Ore, Chromium Ore, Tungsten Ore, Molybdenum Ore, Cobalt Ore, Niobium Ore, Tantalum Ore, Antimony Ore, Lithium Ore, Boron Ore, Titanium Ore, Ore vanadium, strontium ore, rare earth ore, platinum group ore, beryllium ore, gallium ore, germanium ore, selenium ore lithium ore, titanium ore, vanadium ore, strontium ore, ore rare earth, platinum group ore, beryllium ore, gallium ore, germanium ore, selenium ore, zirconium ore, indium ore, tellurium ore, cesium ore, barium ore, hafnium ore, rhenium ore, thallium ore, lead ore, graphite ore, fluorine ore (limited to those combined with metallic elements), magnesium ore, silicon ore and magnesium ore.

(2) As of the date of this article, Okinotori-shima and Minamitori-shima. “Specified remote islands” are defined as remote islands located far from mainland Japan which are important activity bases due to the existence of natural resources and are particularly necessary to develop facilities which will serve as bases of activities in under the related ministerial order.

(3) For more information, please visit the website of the Ministry of Finance.


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