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Politics

Japan's stricter foreign investment rules clear parliament

Market braces for impact of screening requirements for sensitive sectors

Japan's upper house passes the investment bill unanimously on Nov. 22. (Photo by Uichiro Kasai)

TOKYO -- Japan's parliament on Friday passed a bill that toughens restrictions on foreign investments in sensitive industries, despite concerns that the move could impede flows of money into the country.

The upper house of the bicameral Diet voted unanimously in favor of the revision to the foreign exchange law, which had already cleared the lower chamber.

The legislation imposes strict reporting requirements on investments in Japanese companies in fields that affect national security, such as nuclear power and telecommunications. Tokyo wants to prevent leaks of advanced technology and classified information, particularly to China.

Investors acquiring stakes of 1% or more in such companies will have to notify the authorities in advance. Previously, the threshold had been much looser, at 10%.

The revised law also obliges foreign investors to report key proposals, such as divestments of important businesses and board appointments. Critics see this as a barrier to activist investors seeking to shake up the management of Japanese companies, and warn the rule changes could exert downward pressure on investment in the country.

The government did give some ground to ease market concerns.

In principle, foreign asset management companies, including hedge funds, will be exempted from the tighter regulations -- on the condition that they will not be directly involved in management. Foreign brokerages' proprietary trading will also be exempted, with the screening requirement kept at 10%. But investments in certain types of companies, such as arms manufacturers, may still require advance notification.

The Finance Ministry plans to compile a list of publicly traded companies that are subject to the reporting requirements. The ministry will classify Japan's roughly 3,600 listed companies into three categories and announce the standards for reporting. Detailed governmental and ministerial ordinances could be issued as early as spring 2020.

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