Last year, Shinzo Abe, the
Prime Minister of Japan, approved an update to the foreign exchange law. It
will strengthen the control of foreign investment in companies, and the rules
will apply to about 400-500 of Japan’s over 3800 listed companies, which are
connected to specific sectors of national security.
The background to the revision is to prevent influence from abroad in important
companies and therefor strengthen national security. Last November, the Japan
diet updated the “Foreign Exchange and Foreign Trade Act” to lower
the bar of the shareholding ratio of listed companies from 10% to the much
lower 1 % threshold. The sectors include oil and other utilities, nuclear
power, weapons, cyber-security, telecommunications, and railways.
Investors feel some worry that the new rules will add additional paperwork and
more than necessary control over the stock market. However, there will be
exceptions for a range of foreign institutions and funds if they satisfy
specified conditions. For example, wealth funds or public pensions will be
excluded if they pass a screening deeming they are not a national security
threat.
Also, if the institutions have a license with an oversea authority, then an
exception will be made in most cases. For example, a hedge fund or investor
registered with the U.S. Securities and Exchange commissions would be exempt.
At the end of March 2019, foreign investors owned 29% of Japanese equities and
accounted for approximately 60% to 70% of the total trading volume according to
the Tokyo Stock Exchange.
