Publication of the “Report on the Appropriate Framework for the Inward Direct Investment Screening System” – Proposed Amendments to the Foreign Exchange and Foreign Trade Act (Inward Direct Investment Screening System)

Introduction

On January 7, 2026, the Subcommittee on Foreign Exchange and Other Transactions of the Council on Customs, Tariff, Foreign Exchange and Other Transactions published its “Report on the Appropriate Framework for the Inward Direct Investment Screening System” (the “Report”). When the Foreign Exchange and Foreign Trade Act (the “FEFTA”) was amended in 2019 (effective May 8, 2020), a supplementary provision was included stipulating that, if deemed necessary in light of how the amended provisions had been implemented in the five years since such amended Act came into effect, such provisions would be reviewed, and appropriate measures taken based on the results of such review. Published five years after the 2019 amendments took effect, the Report examines the framework of the inward direct investment screening system and sets out the direction for its review, from the perspective of balancing two important policy objectives: further promoting inward direct investment that contributes to the sound development of Japan’s economy and ensuring economic security in an environment where the scope of national security considerations increasingly encompasses the economic sphere.

This newsletter summarizes the key proposed reforms to the inward direct investment screening system set out in the Report, focusing on those matters with the most significant practical implications for foreign investors.

Streamlining Prior Notification Requirements

In light of the significant increase in the number of prior notification filings resulting from the introduction, under the 2019 FEFTA amendment, of a prior notification system triggered by actions such as consent to director election proposals and the successive additions to the list of designated business sectors subject to prior notification, the Report proposes reviewing the scope of transactions subject to prior notification to ensure a risk-based, proportionate screening process. The specific reforms proposed in the Report are as follows:

1. Elimination in Principle of Prior Notification for Consent to Proposals for Reappointment of Directors

Among the action-based prior notification filings in fiscal year 2024, 1,058 were filed by foreign investor shareholders. The vast majority of these, 1,034, were prior notifications for consent to proposals for the appointment of directors, and of those, more than 658 (over 60%) were prior notifications for consent to proposals for the reappointment of directors. Accordingly, the Report states that it would be appropriate to streamline the process by eliminating the prior notification requirement for consent to director election proposals for the reappointment of the same director, provided there are no material changes in circumstances.

In relation to consenting to proposals for the reappointment of directors, the relevant individuals were subject to regulatory screening by the authorities at the time of their initial appointment, and concerns relating to national security are generally considered to be low. Therefore, it would be reasonable to redirect regulatory resources toward new inward direct investment cases that may raise greater concerns. In our view, this proposed approach to reform is also appropriate from the perspective of reducing the administrative burden on foreign investors. However, even if the same foreign investor consents to the reappointment of the same director, changes to the investor’s profile, the circumstances of the target company, or the director’s status may alter the national security assessment. The Report also leaves open the possibility that prior notification may continue to be required in the event of “material changes in circumstances.” It is therefore important to closely monitor what specific situations would constitute such “material changes in circumstances.”

2. Revision of the Scope of “ICT-Related Business Sectors” for Prior Notification

Of the 3,706 prior notification filings for the fiscal year 2024, those relating to “information and communications technology (ICT)-related business sectors,” including software business and information processing services, accounted for 2,072 filings. This represents more than half of all filings. The Report concludes that the scope of the “ICT-related business sectors” designated for prior notification should be limited to those “for which such designation is genuinely necessary from the perspective of cybersecurity measures and other considerations.” In relation to the software industry, although it is generally treated uniformly as a sector requiring prior notification, the degree of importance to national security varies widely. This ranges from software developed exclusively for civilian applications in the private sector to software developed for defense or critical infrastructure purposes. From the perspective of achieving risk-based, proportionate screening that reflects the varying degrees of risk to national security, the policy direction of appropriately narrowing the scope of “ICT-related business sectors” designated for prior notification appears to be reasonable.

That said, the limitation proposed in the Report (i.e., those for which such designation is genuinely necessary from the perspective of cybersecurity measures and other considerations) is abstract, and it does not appear to be particularly straightforward to establish uniform outer limits as to when prior notification screening would not be required. However, as discussed below, if a new framework is introduced that enables ex post responses to national security risks arising from inward direct investment in sectors not designated for prior notification, it would appear possible to conclude that even a significant narrowing of the scope of “ICT-related business sectors” designated for prior notification would not cause any material practical difficulties.

3. Investment in Japanese Companies Holding Critical Technologies or Information

While the Report aims to streamline the scope of prior notification requirements as described in sections 1 and 2 above, it also points out that consideration should be given to whether investments in Japanese companies holding critical technologies or information should be subject to prior notification. Under the current system, the business sectors subject to prior notification on the basis of the technologies they hold include certain manufacturing sectors that hold technologies subject to list controls under the security export control regime. For other sectors subject to prior notification, prior notification screening is likewise conducted in practice based on the importance and sensitivity of the relevant technologies and information. However, concerns have been raised that, in some cases, investments in Japanese companies holding technologies in which Japan holds a position of superiority or indispensability (even if such technologies are not subject to list controls), or that hold sensitive information such as genetic data or credit information, may not be subject to prior notification screening. A policy direction that would bring such cases under the scope of prior notification screening appears appropriate from the perspective of ensuring Japan’s economic security. However, as the Report rightly points out, it is preferable that careful consideration be given to the feasibility of determining whether prior notification is required and to consistency with economic security-related laws and regulations.

Clarification of Risk Mitigation Measures

Under the current prior notification screening process, even where national security concerns remain during the course of reviewing an inward direct investment, the authorities may conclude the review without issuing a recommendation to modify or discontinue the proposed investment. This practice rests on the premise that such concerns are adequately addressed by including certain “compliance undertakings” (junshu jiko) in the notification, which the foreign investor must observe.[1] This practice relies on the premise that foreign investors who breach such compliance undertakings could be treated as having made a false notification and could therefore face criminal penalties or corrective orders (Article 29 of the FEFTA). However, foreign investors have raised a number of concerns, including that this practice lacks an express statutory basis under the FEFTA and that the content of compliance undertakings demanded by the authorities, as well as the review timeline, are difficult to anticipate. The authorities have also raised concerns regarding enforcement. For example, a corrective order cannot be issued unless the relevant inward direct investment or similar activity constitutes an “inward direct investment or similar activity relating to national security, etc.,” and the mere breach of a compliance undertaking is insufficient to trigger criminal penalties or the issuance of a corrective order.

To address such issues and concerns, the Report makes the following proposals:

  1. Add risk mitigation measures (i.e., the compliance undertakings under current practice) to the required items to be stated in a prior notification.
  2. Permit foreign investors to supplement or amend risk mitigation measures during the review process, and to ensure predictability regarding the review timeline, the waiting period (toshi kinshi kikan) should commence from the date of acceptance of the initial notification (provided that if a risk mitigation measure is supplemented or amended near the end of the waiting period, such period may be extended by approximately 14 days).
  3. Clarify that authorities may recommend or order not only modifications to, or discontinuation of, the investment, but also the implementation of specific risk mitigation measures.
  4. Subject post-closing changes to risk mitigation measures to prior notification review (i.e., where the investor seeks to change the risk mitigation measures set out in the notification after completing the investment).
  5. Provide that failure to implement the risk mitigation measures included in the notification may give rise to enforcement orders, including an order to dispose of shares (i.e., a divestiture order).
  6. Enhance predictability by setting out categories and specific examples of risk mitigation measures in guidelines and similar materials.

Introduction of Indirect Acquisition Regulations

Under the current regime, where a foreign investor (the “indirect acquirer”) acquires a foreign corporation or other entity (the “direct holder”) that holds shares or other interests in a Japanese company, thereby indirectly acquiring such shares or interests, such transactions are generally not subject to prior notification screening. As a result, the following cases are generally not subject to prior notification screening:

(i) When a foreign investor (as a direct holder) acquires a Japanese company engaged in a business deemed important for national security following prior notification screening, and that foreign investor (as the direct holder) is subsequently itself acquired by another foreign investor (as an indirect acquirer); or

(ii) Where a foreign investor (as an indirect acquirer) acquires, in a single consolidated transaction, multiple foreign investors (as direct holders) that hold shares of a Japanese company, with the result that the indirect acquirer’s group as a whole acquires a substantial proportion of shares or other interests in the Japanese company.

In this regard, major jurisdictions, including the United States, the United Kingdom, Germany, France, and Canada, have established regimes that enable inward direct investment screening of transactions that result in the indirect acquisition of control over domestic companies. For example, in December 2016, in connection with the proposed acquisition of German semiconductor equipment company Aixtron SE by Grand Chip Investment GmbH (a German limited liability company whose ultimate owners reportedly included Chinese investors), the President of the United States issued a Presidential Order prohibiting the acquisition of Aixtron SE unless the Aixtron SE’s U.S. subsidiary was excluded from the transaction. This represents an instance of authorities actually intervening in an indirect acquisition.

In light of the foregoing, the Report proposes addressing the gap in the current regime under which Japanese companies can effectively be acquired indirectly by foreign legal entities through M&A transactions without undergoing prior notification screening. Specifically, the Report indicates that certain indirect acquisitions should be subject to prior notification screening by treating them as “subsequent changes to the ultimate parent company.” Specifically, the following amendments have been proposed:

(a) Expand the definition of “inward direct investment, etc.” to include, among others, the following acts: (i) an indirect acquirer acquiring 50% or more of the voting rights of a direct holder; (ii) persons affiliated with the indirect acquirer coming to constitute a majority of the directors of the direct holder; and (iii) other acts similar to these.

(b) As a general rule, require the indirect acquirer to file a prior notification where the direct holder holds 1% or more of the voting rights, etc., in a Japanese company that would otherwise be subject to prior notification requirements under the current regime. However, for indirect acquirers other than those that are deemed, by category, to require a high level of scrutiny (i.e., foreign investors ineligible to use the prior notification exemption scheme), no filing would be required where the direct holder holds less than 50% of the voting rights, etc., in the Japanese company.

Notably, this proposal seeks to apply a risk-based approach calibrated to the attributes of the indirect acquirer. Specifically, where the indirect acquirer is a foreign investor ineligible to use the prior notification exemption scheme, prior notification would be broadly required if the direct holder holds 1% or more of the voting rights, etc., in the Japanese company. Conversely, in all other cases, no prior notification filing would be required where the direct holder holds less than 50% of the voting rights, etc., in the Japanese company. In this regard, amendments to the cabinet orders and ministerial ordinances under the FEFTA that took effect in May 2025 provided that foreign investors who, under contracts with foreign governments or similar entities or under foreign laws, are obligated to cooperate in information gathering activities of such foreign governments or similar entities are designated as “specified foreign investors,” and like foreign governments and state-owned enterprises, are ineligible to use the prior notification exemption scheme. By focusing on categories of foreign investors that are deemed, by category, to require a high level of scrutiny, and by narrowing the scope of indirect acquisition regulations to transactions by such foreign investors, the proposed approach aims to establish an inward direct investment screening system that balances national security concerns with the promotion of sound investment.

Addressing Investment Activities Under the Control or Influence of Foreign Governments

Under the current regime, Japanese companies investing in a designated business sector that requires prior notification, are, as a general rule subject to prior notification screening as foreign investors if non-residents or foreign corporations, etc. hold 50% or more of their voting rights. In addition, investments made for the benefit of foreign investors (i.e., investments made for the account of foreign investors) are also subject to prior notification obligations. However, concerns have been raised that, apart from these cases, there are investments made under the control or influence of foreign investors that are deemed, by category, to require a high level of scrutiny. Examples include a case in which “a resident employed by a foreign investor, acting on the foreign investor’s instructions, acquires (in the resident’s own name) shares in a Japanese company engaged in a designated business sector that requires prior notification for the purpose of providing the foreign investor with technology held by such Japanese company.” It has been suggested that such investments should also be subject to prior notification screening.

In light of these concerns, the Report proposes that it would be appropriate to deem persons other than foreign investors to be foreign investors where it is found that such persons are substantively making investments as a single entity with foreign investors under the foreign investors’ control or influence, such as in the following cases: (1) where a person makes investments pursuant to instructions from a non-resident, etc., based on a contract or similar arrangement with such non-resident, etc.; (2) where a person who has a special relationship[2] with a non-resident, etc. makes investments pursuant to instructions from such non-resident, etc.; or (3) when a person with a special relationship with a non-resident, etc., makes investments for the purpose of transferring a business in, or providing technology relating to, a designated business sector that requires prior notification to that non-resident, etc. At the same time, from the perspective of a risk-based regime aimed at preventing regulatory circumvention, the Report indicates a policy direction to limit the scope of the prior notification requirement to cases involving control or influence by foreign investors who are deemed, by category, to require a high level of scrutiny (i.e., non-residents who are ineligible to use the prior notification exemption scheme).

This approach of “deeming persons other than foreign investors as foreign investors where they have a certain relationship with foreign investors” is arguably similar to the “deemed export” concept under the security export control regime administered under the FEFTA. Following “Notification for Transactions or Acts of Transferring Technology Requiring Permission pursuant to Article 25 (1) of the Foreign Exchange and Foreign Trade Act and Article 17 (2) of the Foreign Exchange Order (Notification of Technology Transfer)” effective in May 2022, it has been clarified that, even where the technology is provided to a resident (who would generally fall outside the scope of security export controls), such provision will be treated in the same manner as a provision of technology to a non-resident, etc., if the resident is under the strong influence of a foreign government or foreign corporation, etc., based on an employment contract or economic interests, etc. (the Specific Categories[3]).

Ex Post Measures for Investments in Non-Prior Notification Business Sectors

Under the current regime, investments in Japanese companies that do not operate in designated business sectors subject to prior notification are not subject to prior notification screening. Accordingly, even if national security risks were to materialize, there is no mechanism under the FEFTA to address such risks. Accordingly, the Report, on the premise that ex post measures are also necessary for such investments where national security risks materialize after investment has been completed due to changes in the international situation or similar factors, indicates that the following measures should be available for acquisitions of 10% or more of shares or voting rights (or equivalent) in non-designated business sectors by foreign investors who are deemed, by category, to require a high level of scrutiny (i.e., foreign investors ineligible to use the prior notification exemption scheme):

  1. Where, due to changes in the international situation or similar factors, it becomes necessary to determine whether the investment falls within the category of an investment posing a significant risk of giving rise to circumstances that would impair national security, the authorities may require submission of a report;
  2. Where, based on such report, it is determined that the investment poses a significant risk of giving rise to circumstances that would impair national security, the authorities may take measures equivalent to those available under prior notification screening (including, recommendations or orders for the implementation of risk mitigation measures or the disposal of shares, and other similar actions); and
  3. Where emergency measures are required, the authorities may order such measures directly without first issuing a recommendation.

February 25, 2026

View original article here.

Authors: Oki Osawa (Partner), Mayuko Takamura, Tatsuyoshi Kitani

Endnotes

[1] Oki Osawa, “Investment Management and Practical Issues Under the Foreign Exchange and Foreign Trade Act at the Ministry of Economy, Trade and Industry,” Shoji Homu No. 2294, p. 21.

[2] “Special relationship” refers to employment relationships, family relationships, and continuing (i.e., ongoing) economic relationships, and similar relationships.

[3] The Specific Categories are (i) persons under the control of a foreign government, etc., or foreign corporation, etc., based on an employment contract or similar arrangement, (ii) persons under the substantive control of a foreign government, etc., based on economic interests, and (iii) persons who act in Japan under the direction of a foreign government, etc.