[Japan] Japans new rules for foreign investments

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.

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