Japan’s Diet Passes Amendment to Foreign Direct Investment Screening Regime

The British Chamber of Commerce in Japan is delighted to highlight this piece by member firm Westhill Law.

Introduction of a CFIUS-Style Framework and Potential Impact on UK Companies

On 29 May 2026, Japan’s Diet passed a bill amending the Foreign Exchange and Foreign Trade Act ('FEFTA') to strengthen Japan’s screening framework for inward foreign direct investment. The amendment follows the 2020 reform of FEFTA and reflects the Japanese government’s view that further revisions to the FDI screening regime are necessary in light of changes in the national security environment and increasing geopolitical risks.

As these amendments may affect UK companies investing in or operating in Japan, this article outlines the key revisions introduced by the bill and considers their potential implications for BCCJ members.

1. Overview of the Amendment
Under the current FEFTA regime, foreign investors are required to submit a prior notification when making certain investments in Japanese companies engaged in designated business sectors. 

The amendment introduces five principal reforms aimed at strengthening Japan’s foreign investment screening framework and enhancing the government’s ability to address national security concerns arising from inward foreign direct investment.

(1) Screening of Indirect Acquisitions
Under the current FEFTA regime, a change of control over a foreign company holding shares in a Japanese company does not, in itself, trigger FEFTA review. By contrast, indirect transfers of control are already subject to foreign investment screening in many Western jurisdictions, including the United States and the United Kingdom. 

The amendment introduces a new screening mechanism applicable where a foreign investor indirectly acquires voting rights or similar interests in a Japanese company through the acquisition of control over a foreign corporation that directly holds such voting rights or interests in the Japanese company (the 'Direct Holder').

Specifically, transactions subject to review will include: (i) acquisitions by a foreign investor of 50% or more of the voting rights in the Direct Holder, and (ii) transactions resulting in persons related to the foreign investor constituting a majority of the directors of the Direct Holder.

The scope of foreign entities captured by the new rules will ultimately depend on the relevant Cabinet Orders. However, if the Cabinet Orders follow the direction suggested in the report published on 7 January 2026 by the Council on Customs, Tariff, Foreign Exchange and Other Transactions (the 'Report'), the following framework is anticipated for listed Japanese companies:  

• for foreign investors categorised as 'high-risk foreign investors' (such as sovereign wealth funds and Chinese investors), a prior notification would generally be required where the Direct Holder directly holds 1% or more of the voting rights in a listed Japanese company; and
• for foreign investors not categorised as high-risk foreign investors, a prior notification would generally be required where the Direct Holder directly holds 50% or more of the voting rights in the listed Japanese company.

With respect to unlisted Japanese companies, neither the amendment nor the Report specifies a minimum threshold. Accordingly, unless future regulations introduce a limitation, an indirect acquisition could potentially fall within the scope of review even where the Direct Holder holds only a single share in the unlisted Japanese company.

(2) Formalisation of Risk Mitigation Measures
Under the current FEFTA screening process, where potential national security concerns can be adequately addressed through mitigation measures proposed in the prior notification, the relevant authorities will generally grant clearance subject to the foreign investor agreeing to implement such measures.

However, this practice has not been expressly codified in FEFTA. The amendment therefore formally incorporates into the statutory framework the use of risk mitigation measures as part of the foreign investment review process.

Under current practice, once risk mitigation measures are agreed with the government, the foreign investor is required to withdraw the original filing and submit a new filing incorporating the agreed mitigation measures. As a result, clearance is typically delayed by several additional business days. The amendment may reduce the time required to obtain clearance in certain cases, as foreign investors would be able to obtain clearance without extending the waiting period, unless the final day of the waiting period would occur earlier than 14 days after the authorities receive the revised notification containing the mitigation measures.

The Report also suggests that the government should publish guidelines setting out examples and categories of mitigation measures. If implemented, such guidelines would likely improve predictability for foreign investors by providing greater visibility into the types of mitigation measures that may be required during the review process.

(3) Expansion of Anti-Circumvention Rules Relating to Investments by Non-Foreign Investors

The amendment also expands the anti-circumvention provisions under FEFTA to prevent foreign investors from avoiding regulatory scrutiny through indirect or proxy investment structures. Under the amended framework, the following investments may be treated as investments by foreign investors and therefore fall within the scope of FEFTA review:

• investments made on the account of foreign investors;
• investments made pursuant to contracts, foreign laws, or other similar arrangements; and
• investments made by persons having a special relationship with foreign investors, such as
  through shareholding relationships, family relationships, or employment relationships.

The detailed scope of these rules will be specified in future Cabinet Orders. However, the Report suggests that the expanded anti-circumvention rules should primarily apply to investments involving high-risk foreign investors.

(4) Post-Investment Intervention in Non-Designated Business Sectors

Under the current FEFTA regime, investments by foreign investors into Japanese companies that are not engaged in designated business sectors are generally not subject to prior notification requirements, although post-investment reporting obligations may apply in certain circumstances.

The amendment introduces a new post-investment intervention mechanism under which the government may take action where national security risks arise after completion of an investment as a result of changes in international circumstances or other subsequent developments. Under this framework, the government may request reports from foreign investors and, following its review, may issue recommendations requiring the disposal of shares or the implementation of other necessary measures. Such requests for reports may only be made within five years from the date of the relevant investment.

In addition, unlike the CFIUS regime in the United States, the amendment does not, at least based on the current statutory language, establish a mechanism allowing parties to voluntarily notify transactions that could potentially become subject to post-investment intervention measures in order to obtain prior clearance.

The specific categories of transactions subject to such post-investment intervention measures will be determined by future Cabinet Orders. However, the Report proposes limiting the scope to acquisitions by high-risk foreign investors of 10% or more of the shares in a Japanese company.

(5) Establishment of a CFIUS-style Consultation Framework

Japan’s foreign investment screening system under FEFTA is currently administered primarily by the Minister of Finance together with the competent minister(s) responsible for the relevant industry sector.

The amendment introduces a new framework under which opinions may also be sought, where necessary, from the Prime Minister, the Minister for Foreign Affairs, and other relevant governmental agencies. This reform is expected to evolve Japan’s investment screening regime into a more comprehensive inter-agency review framework resembling CFIUS.

In practice, however, a certain degree of inter-agency consultation is understood to have already occurred under the existing regime. Accordingly, the day-to-day operation of the review process may not change dramatically in the immediate future. Nevertheless, future developments in the implementation and operation of the review process should be monitored closely.

(6) Timeline of the Amendment

The provisions relating to the establishment of the new CFIUS-style inter-agency consultation framework will come into force on the date of promulgation of the amendment. Most of the remaining amendments, however, will become effective on a date to be specified by Cabinet Order within one year from promulgation.

2. Potential Impact on BCCJ Members and What’s Next
(1) Effect on Future Transactions and Reorganisations

From a practical perspective, the introduction of prior screening for indirect acquisitions is likely to have the most significant impact on foreign investors. 

UK investors considering acquisitions of non-Japanese companies will now need to assess whether potential target companies have investments in Japan and whether the contemplated transaction could indirectly trigger FEFTA’s prior notification requirements. Where a pre-closing notification is required, obtaining FEFTA clearance should be included as a condition precedent in the transaction documentation.

In addition, intra-group transfers of shares may also become subject to notification requirements under the amended regime if they result in an indirect transfer of shares in a Japanese company. Accordingly, UK companies and investment funds with investments in Japan should carefully consider whether internal restructurings or intra-group reorganisations could trigger FEFTA filing obligations.

(2) Changes to the Scope of Designated Business Sectors

The Report suggests that, in light of the increasing number of prior notifications, the scope of designated business sectors may be reviewed and updated in order to optimise filing volumes. In particular, the Report recommends narrowing the scope of prior notification requirements within the information and communications technology sector to businesses that are genuinely necessary from a cybersecurity perspective. Under the current categorisation, companies engaged in activities such as software development are captured relatively broadly, which has contributed to the increasing number of filings.

At the same time, the Report also suggests that the scope of businesses subject to prior notification should be reconsidered in a manner consistent with Japan’s economic security legislation, including the Act on the Promotion of Ensuring National Security Through Integrated Implementation of Economic Measures. This indicates that additional designated business sectors could be added in the future.

Accordingly, further revisions to the classification of designated business sectors may occur in the near future. As a result, some companies currently subject to the regime may ultimately fall outside its scope, while other companies that are not presently subject to the regime may become newly captured. UK companies investing in or operating in Japan should therefore closely monitor future developments regarding the scope of designated business sectors.

(3) Enforcement Trends

A significant recent development in FEFTA enforcement occurred in April 2026, when the Japanese government issued a recommendation to discontinue the proposed acquisition of major machine tool manufacturer Makino Milling Machine by MBK Partners, an Asia-based investment fund. Following the recommendation, MBK decided not to proceed with the tender offer.

Makino Milling Machine is one of the world’s leading manufacturers of machine tools, and its products are widely used by Japanese defence equipment manufacturers. The government’s review considered factors such as the potential impact on maintaining Japan’s industrial and technological base relevant to national security, as well as the risk of leakage of sensitive technologies and information.

This case represents one of the clearest indications to date of the Japanese government’s increasingly stringent approach to FEFTA-based national security reviews, particularly given that the government had not issued any comparable recommendations or orders since 2008.

3. Closing Remarks

As discussed above, many important aspects of the amendment will be clarified through future Cabinet Orders and subordinate regulations. It will therefore be important to closely monitor further regulatory developments, including the extent to which governmental scrutiny may be enhanced under the amended regime and the newly introduced CFIUS-style review framework.

Given the expanding scope of Japan’s foreign investment screening regime and the increasing focus on national security considerations, UK companies and investors engaging in transactions involving Japan should carefully assess potential FEFTA implications at an early stage of transaction planning.

If you have any questions regarding the matters discussed in this article, FEFTA compliance, or other regulatory considerations relating to investments in Japan, please feel free to contact Westhill Law.