Investment Restrictions: Is Japan Turning French?

(Oct 2019) In response to proposed legislation that seeks to curb some foreign ownership of Japanese companies, Peter explains the rationale as well as the likely outcome.


The new investment restrictions are aimed at China, not foreign investors

  • But they have been badly drafted and explained
  • The government plans to issue ordinances that will reassure fund manager
  • They would do better to handle the security implications of foreign investments via a specialized institution like America’s CFIUS rather than new laws

Some foreign investors are in a tizzy – and understandably so. The Japanese government is in the process of introducing new regulations that could potentially make life difficult for the activist funds who have been the shock troops of Japan’s corporate governance reforms. Specifically, investors will be required to ask permission from the authorities if they intend to buy more than 1% of the stock of a strategically sensitive company.

That is a considerably greater obstacle than the previous trigger level of 10%. Ordinary portfolio investors are exempt, it seems, but only if they do not intend to influence company management. These days, though, ordinary investors are expected, and sometimes required, to put constructive pressure on managements under the rubric of “engagement.” For activist investors, pushing and coaxing managements to create more shareholder value is their business model. If that is no longer possible, they might as well pick up their football and find somewhere else to play.

The definition of “strategically sensitive” is also fuzzy. It appears to include agricultural production. Would that mean giving protected status to, for example, food companies? That is what the French government did in 2005 when blocking PepsiCo’s takeover of yoghurt maker Danone, described as “an industrial jewel” by French Prime Minister Dominique de Villepin.

Despite these unhelpful ambiguities, there can be little doubt that the motivation of the Japanese legislation was not to roll back governance reforms and discourage foreign investors. After all, the revival of the Japanese equity culture has been a crucial and successful element in Prime Minister Abe’s programme of economic and national revival – to the extent that in 2015 he entreated investors at the New York Stock Exchange to “buy my Abenomics.”

In all likelihood, what senior Japanese politicians and bureaucrats had in mind was the need to protect critical national assets from purchase by unfriendly states, specifically China. For many years, Japan has been aspiring to full membership of the “Five Eyes” intelligence gathering and sharing community, made up of the U.S., the UK, Canada, Australia and New Zealand. What stands in the way, according to Arthur Herman of the Hudson Institute, is a lack of confidence in Japan’s industrial security. The controversial State Security Law, which the Abe administration passed in 2013, was likewise intended to reassure allies that Japan’s had sufficient legal infrastructure in place to be trusted with sensitive information.

With the outlines of the new Asia-centric Cold War now clearly delineated, the idea that capital should flow across borders unimpeded and unmonitored is strictly for the birds. Japan’s problem is that it is attempting to establish a set of legal criteria to decide what is acceptable and what is not. The result has been ham-fisted, to say the least. For such decisions can only be made through judgement – and judgement informed by undisclosable intelligence.

This is the approach that the United States has taken with “CFIUS,” the Committee on Foreign Investment in the United States, which requires all foreign acquirers to register their deals. A recent example is SoftBank’s purchase of an 80% stake in WeWork. Presumably that will go through without a hitch, as with the overwhelming majority of cases. However, CFIUS can also impose stringent conditions on a purchase, as it did with SoftBank’s acquisitions of Sprint (no Huawei equipment allowed) and private equity group Fortress (no involvement in investment decisions),.

CFIUS started life in the mid-1970s, but only became a politically significant actor in the US-China confrontation when the Obama administration blocked two foreign companies, one German and one Dutch, from selling off high-tech US assets to Chinese buyers. It sits under the aegis of the Treasury Department, but is effectively a secretive star chamber that exists, like the intelligence services, outside the standard procedures of the civil law. The members are high-ranking administration officials. Their findings are not disclosed. Potential acquirers and acquires have no role in the process and cannot appeal.

Recently, CFIUS has been beefed up by the Trump administration’s Foreign Investment Risk Review Modernization Act (“FIRRMA”), which extends its remit to real estate transactions and minority stakes. According to law firm Mayer Brown, the emphasis is on “TID businesses”, meaning those involved in technology, infrastructure and data. What CFIUS does not do is concern itself with tiny stakes in companies or get in the way of foreign activist investors.

Japan’s cabinet has approved the bill as is, but plans to remedy the obvious flaws by ministerial ordinances, which will likely be aimed at reassuring fund managers, activists included, that they have nothing to fear. It would better to scrap the whole thing, revert to the pre-existing ceiling of 10% – stakes lower than that confer no rights anyway – and set up a Japanese equivalent of CFIUS which operates by judgement and understands the difference between friends and foes.


Peter Tasker is a Strategist for Arcus. The views and opinions expressed in this document are those of the author and do not reflect the opinion of Arcus Investment Limited (“AIL”), Arcus Investment Asia Limited (“AIAL”) or Arcus Research Limited, Japan Branch (“ARL”) collectively referred to as “Arcus” or the “Arcus Group”.