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Rule-tightening signals Japan wants investors to toe the line

'Very, very low' 1% threshold for reporting seen as barrier to activism

Japanese Prime Minister Shinzo Abe delivers a speech on Japan's economy and investment-friendly reforms at New York Stock Exchange in 2017, although new legislation to scrutinize foreign investments in Japan is drawing fire.   © Reuters

HONG KONG -- Investors have written to the Japanese government, seeking clarification over a proposed foreign investment law that would significantly tighten scrutiny of market activity, the secretary general of the Asian Corporate Governance Association said in Hong Kong recently.

Nikkei interviewed Jamie Allen on Nov. 6, a day after he had written a second letter to the Ministry of Finance requesting further details on the law. At the core of the legislation is a requirement that foreign investors must obtain approval from regulators for investments of 1% and more in a wide range of sectors. The current rule requires permission only for investments of 10% and more in a company's shares.

Allen said that while it was understandable for governments to impose restrictions on foreign investment for national security reasons, he cautioned that the "1% threshold is very, very low."

Analysts had said that costs to investors would increase significantly due to the amount of paperwork that would be required.

Allen had already written a letter to the government after the proposal was made on Oct. 24. The government responded the next day, but he said that "the fundamental concerns ... remain unchanged."

Allen said that "it remains unclear what process the MOF will follow in responding to foreign investors who must prenotify." He was also wanted to know which sectors would be deemed critical in terms of national security.

The government has said that the measures are aimed at protecting national security and follow similar steps in the U.S. and the European Union. They are designed to "appropriately respond to investments that may impair national security," according to a presentation submitted by the Ministry of Finance on Oct. 8.

Allen's comments showed the distrust and frustration foreign investors feel toward the administration of Prime Minister Shinzo Abe. Another executive at a well-known investment fund echoed similar comments in Singapore.

He said that "his company was carefully watching whether the planned law revisions might bring about 'unintended consequences' such as a drop in investments."

Both investors are not the activist investors that the Japanese government is thought to want to target with this law and analysts have said that MOF wording suggests that such investors' activities in Japan would be exempt from the tighter restrictions.

Analysts have said that the changes may stifle the wave of investor activism that is gaining momentum in Japan. It is thought that Tokyo wants foreign investors not to have a say in such matters, some said.

Although there are no explicit remarks made about activist investors, some in the market are already saying that the new legislation shows that Japan hasn't changed at all and still want investors to toe company lines. Other investors have expressed worries that there might be loopholes or pitfalls in the legislation that could catch them out.

When the current Abe government rose to power late 2012, some foreign investors were of the view that the administration's key objective was to implement constitutional amendments and that its economic policies were little more than tools to pave the way toward such ends.

Over the past couple of years, however, a string of ministerial resignations have given investors the strong impression that discipline in the cabinet was slipping. Also, speculation of a power struggle between Japan Investment Corp., the newly revamped public-private innovation fund, and the Ministry of Economy, Trade and Industry has led to some concern over the influence of the latter.

The Tokyo stock market has been on a bull run this year in part due to strong buying from foreign investors, who spent 3 trillion yen ($27.47 billion) from the start of this year. Whether this will continue after the implementation of the law remains to be seen.

Some analysts still hope that the concerns raised by foreign investors might prompt the Abe cabinet to return to a market-oriented policy.

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