Introduction

Japan's Ministry of Finance ("MOF"), in coordination with relevant industry sector ministries, reviews FDI under the Foreign Exchange and Foreign Trade Act ("FEFTA"). FEFTA mandates review for a wide range of transactions and imposes a hair-trigger threshold, though certain exemptions may be available for qualifying investors in public market transactions who agree to comply with certain covenants.

Summary of major changes in 2025

• In 2025, the Japanese government added a new subcategory of core business industries under FEFTA called "specified core sectors" and two new categories of foreign investors: "Specified Foreign Investors," referred to as "Type A Investors," and "Entities Equivalent to Specified Foreign Investors," referred to as "Type B Investors." This change aligns with the Economic Security Promotion Act, which has a stated purpose of preventing critical infrastructure from being exploited to disrupt the stable provision of services originating outside Japan. Under this framework, businesses classified as "specified essential infrastructure service providers" under the Economic Security Promotion Act that operate in core business sectors are designated as specified core sectors.
• Type A Investors are defined as entities or individuals who have obligations to cooperate with foreign governments in gathering information related to Japan's national security. Type B Investors are foreign investors who are not Type A Investors but are considered similar in substance. Type A Investors cannot use the exemption scheme, but Type B Investors may use the exemption scheme if they meet additional conditions, including limiting their shareholding to 10 percent or less. For both categories, investments in specified core sectors are never eligible for the exemption scheme.
• Following the introduction of the new specified core sectors category, MOF updated its list of public companies in July 2025. Public companies are now classified into "non-core sectors," "core sectors," "specified core sectors" or "undesignated sectors," as detailed below.

Who files?

Under FEFTA, filing requirements depend on the target's business activities. A foreign investor must submit a "prior notification" (a request for prior consent) and/or a post-transaction report through the Bank of Japan to MOF and the relevant ministries for any action classified as an "inward direct investment," defined broadly and covering noninvestment activities or a designated acquisition.

Foreign investors include individuals who do not reside in Japan, termed "nonresidents"; entities or other groups established under the laws or regulations of, or having their principal offices in, foreign countries; entities in which a foreign individual or entity holds 50 percent or more of the total voting rights; partnerships operating in the investment business in which 50 percent or more of the total capital has been contributed by foreign entities, foreign groups or nonresidents, or in which the majority of general partners are nonresidents; and entities in which the majority of directors or representative directors are nonresidents.

Types of deals reviewed

MOF and Japan's ministries with jurisdiction over the target entity's business review two types of transactions: inward direct investments and designated acquisitions.

The definition of inward direct investments is broad, as it can cover the acquisition of shares or voting rights, as well as the exercise of those rights. For example, a foreign investor's acquisition of one percent or more of a listed target entity's outstanding shares or total voting rights is considered an inward direct investment, as is any acquisition of shares, even a single share, of an unlisted target entity obtained from a resident shareholder.

Other inward direct investment scenarios include when a foreign investor obtains proxy voting authority at an unlisted company or obtains proxy voting authority equivalent to 10 percent or more of the total voting rights of a listed company.

The exercise of voting rights constitutes an inward direct investment where a foreign investor consents to material changes to the business purposes of an unlisted target company, regardless of ownership percentage, or a listed target company where the foreign investor owns one-third or more of the target company's total voting rights.

The same applies when the foreign investor consents to shareholder meeting proposals to nominate that foreign investor or certain related parties to the board, or to certain other extraordinary transactions such as a sale of the company, regardless of ownership percentage for an unlisted target company, or when holding one percent or more of the voting rights for a listed target company.

An inward direct investment also occurs where a foreign investor agrees with other foreign investors to jointly exercise their respective beneficially owned voting rights and the aggregate beneficially owned voting rights account for 10 percent or more of the total voting rights of a listed company; where a foreign investor lends more than ¥100 million (US$665,000) to a Japanese company and the company's debt to the foreign investor accounts for more than 50 percent of the company's debt; or where the foreign investor purchases corporate bonds that meet certain criteria, including that they amount to more than ¥100 million and account for more than 50 percent of the company's debt.

A designated acquisition is a transaction where a foreign investor acquires any shares, even just one share, of a nonlisted company from another foreign investor.

Scope of the review

For inward direct investments, foreign investors are required to make a "prior notification" (request for prior consent) and/or a post-transaction filing through the Bank of Japan to MOF and relevant ministries, depending on several factors.

Prior notification filings are required if the target entity is engaged in a designated industry and the foreign investor meets certain criteria, such as having a particular nationality or having offices in certain locations, and does not otherwise qualify for exemptive relief.

Post-transaction filings are required for inward direct investments when the foreign investor has obtained prior notification approval and must be made within 45 days of completing the transaction.

For designated acquisitions, foreign investors are required to submit a prior notification filing if the target company is engaged in designated industries. Post-transaction filings are not generally required for designated acquisitions unless the foreign investor claimed an exemption to the prior notification filing.

Review process timeline

Foreign investors must make prior notification filings within the six-month period prior to completion of the transaction. Approvals are valid until six months from the date on which the filings were officially received by the Bank of Japan.

By default, transactions subject to a prior notification filing cannot be closed until the expiration of a 30-calendar-day waiting period from the date on which MOF and the ministry having jurisdiction over the transaction received the filing. MOF and the relevant ministries can extend the waiting period up to five months if necessary for review.

If MOF and the relevant ministry find the transaction problematic in terms of national security, they may recommend that the foreign investor change or discontinue the transaction after consultation with the Council on Customs, Tariff, Foreign Exchange and Other Transactions. The foreign investor must notify MOF and the relevant ministry within 10 days whether it will accept the recommendation. If the foreign investor does not provide notice or refuses to accept the recommendation, MOF and the relevant ministries may order modification or termination of the transaction before the expiration date of the waiting period.

How foreign investors can protect themselves

Foreign investors are categorized into four types under the exemptions from prior notification filings: foreign financial institutions; general investors; Type B Investors; and nonqualified foreign investors (which includes Type A Investors). The scope of the exemption differs depending on the type of foreign investor involved.

All of the exemptions are subject to compliance with three conditions:

1. The foreign investor and its closely related persons must not serve on the board of the target company as directors or audit and supervisory board members.
2. The foreign investor must not make proposals at shareholders meetings to dispose of material businesses in designated industries.
3. The foreign investor must not access information regarding sensitive confidential technology related to the target company's business in designated industries.

In principle, whether an issuer's business is classified as being in a designated industry is determined based on the issuer's actual business. In practice, a filer makes the classification judgment based on publicly available information, such as company websites and commercial registries, as well as input from the issuer, if available.

Foreign investors may refer to, but cannot rely on, MOF's list of public companies, which preliminarily classifies businesses as being involved in "noncore sectors," "core sectors," "specified core sectors" or "undesignated sectors," based on survey responses.

For investors seeking flexibility and speed in response to market trends, such as investment funds, it may be worth considering making a prior notification filing more frequently than every six months for possible investments in a target company.

In most cases, after making a prior notification, filers receive questions from the regulator regarding their business or intended transactions with the issuer, and they may be asked to make covenants related to future potential transactions.

The Ministry of Economy, Trade and Industry introduced example covenants on its website, including commitments not to propose abolishing or transferring certain businesses that would disrupt supply chains of national defense-related items; not to access the confidential company information; or to eliminate foreign government influence. There is room to negotiate covenant language, and filers may propose revisions to the ministries.

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