by：Kensho Onoda、Watchaya Peungnam
Japan’s Foreign Investment Regulations (overview)
When acquiring a company, making an investment, or taking over a business in Japan, some countries only require consideration of company law, competition law, or investment agreements. In contrast, Japan’s Foreign Exchange and Foreign Trade Act, commonly known as the FEFTA, is also crucial. The FEFTA does not generally prohibit investment in Japan itself. However, it establishes a system where authorities can review certain investments in advance if they relate to national security, public order, public safety, or the Japanese economy.
This is the first point of caution for foreign startups. In Japan, consideration under the FEFTA may be required not only for large-scale M&A but also for small investments, acquiring minority stakes, involvement in director appointments, certain long-term loans, and more. In other words, even actions that appear to be “still initial involvement” from a business perspective can be subject to notification requirements from a legal standpoint.
What types of investments are subject to this?
1．Overview of Regulations
The Foreign Exchange and Foreign Trade Act stipulates that foreign investors undertaking inward direct investment, etc., may be required to submit either a prior notification or a subsequent report. The specific requirements and necessary procedures are explained below.
2. Foreign Investor
Under the FEFTA, a “foreign investor” broadly includes the following categories:
(1) Non-resident individuals and foreign entities
① Individuals who are non-residents of Japan
② Foreign corporations and other foreign entities (established under foreign law or located in a foreign country)
(2) Entities controlled by foreign investors
③ Corporations or partnerships (which are formed with the agreement to engage in the investment business) in which non-resident individuals or foreign entities directly or indirectly hold 50% or more of the voting rights
(3) Entities with foreign-controlled management
⑤ Japanese entities in which a majority of the officers or representative officers are non-resident individuals
This classification is based on residency status in Japan. Therefore, it is important to note that even if a Japanese national is a shareholder, they may be subject to regulations if they reside abroad.
Furthermore, even Japanese corporations may be subject to regulation if their shares are held by foreign residents.
3. “Inward Direct Investment, etc.”
Inward direct investment refers to acts falling under the following categories. Common problematic types are listed here.
① Acquisition of shares or equity interests
② Exercising voting rights to consent to substantial changes in business objectives, etc.
③ Establishment of branches in Japan, etc.
④ Lending of Funds to Japanese entities
⑤ Acquisition of business operations, etc.
⑥ Indirect Acquisitions (Under anticipated 2026 amendments, acquiring 50% or more of control over a foreign parent company that owns some number of shares of a Japanese company will also be regulated)
The applicable thresholds differ significantly depending on whether the target company is listed or unlisted.
In the case of unlisted companies (including most startups), the acquisition of any shares or equity interests, regardless of size, constitutes “inward direct investment” under FEFTA. In other words, even the acquisition of a single share or a very small minority stake may trigger filing requirements.
By contrast, for listed companies, regulatory thresholds are generally triggered when a foreign investor acquires 1% or more of the shares or voting rights, although the applicable filing requirement (prior notification or post-investment reporting) depends on the business sector and other factors.
Prior Notification
1. When is prior notification required?
Generally, prior notification is required if the investee company operates in a “designated industry.” These industries include sectors closely related to national security, such as defense, aerospace, power, telecommunications, and cybersecurity.
2. Procedure
When prior notification is required, the foreign investor must submit the prescribed notification form through the Bank of Japan, which acts as the receiving office, to the Ministry of Finance and the competent minister responsible for the relevant business sector. While foreign investors may perform this procedure themselves, it is important to note that if they do not reside in Japan, a Japanese resident must submit it on their behalf.
3. Timeline
The prior notification must be submitted no more than six months and no less than 30 days before the planned investment execution date. Once the notification is accepted, the standard review period is 30 days from the date of acceptance. However, the competent authorities may extend this period in cases where the investment requires more detailed examination. During this period, the investment cannot be executed.
Note that executing an investment without prior notification where required may result in serious consequences, including administrative orders (such as suspension or modification of the investment, etc.) as well as criminal penalties.
4. Prior Notification Exemption System
Even where an investment falls within a designated business sector, prior notification may not always be required. Under FEFTA, certain investors, such as general investors and foreign financial institutions, may rely on a prior notification exemption system, provided that specific conditions are satisfied.
These conditions are designed to ensure that the investor does not exert influence over sensitive business activities. In general, the investor must agree, among other things:
- not to become a director or corporate officer of the investee company;
- not to make proposals at shareholders’ meetings to transfer or dispose of designated business activities; and
- not to access non-public technical information relating to designated business sectors.
Where these conditions are met, the investor may proceed without prior notification and instead make a post-investment report.
However, foreign startups and VC investors should exercise caution: this exemption is generally unavailable if the target operates in a “core” business sector, if the investor requires a board seat (as many VCs do), or if the investor falls under the newly restricted “Specified Foreign Investors” categories (e.g., individuals or entities with obligations to cooperate with foreign government intelligence activities).
Post-Investment Reporting
1. When is a Post-Investment Report Required?
If the investee company does not operate in a designated industry, submitting a post-investment report is sufficient.
2. Procedure
Similar to the prior notification, the post-investment report must be submitted through the Bank of Japan, which serves as the receiving office, to the Ministry of Finance and the competent minister responsible for the relevant business sector.
As with prior notification, if the foreign investor does not reside in Japan, a Japanese resident must submit the report on their behalf.
3. Timeline
The post-investment report must be submitted within 45 days of the date the investment was executed or the date the relevant business activity commenced.
Failure to comply with the post-investment reporting procedure may result in criminal penalties.
Upcoming Regulatory Developments (2026 Amendments)
The regulatory framework under FEFTA continues to evolve, and further amendments are expected to be enacted in 2026 (with enforcement likely following in or after 2027).
One notable development concern is the so-called “indirect acquisitions.” Under the current framework, acquisitions of foreign holding companies that own shares of a Japanese company have, in many cases, fallen outside the scope of prior notification requirements.
However, the anticipated amendments are expected to address this gap. In particular, where a foreign investor acquires a significant interest (e.g., 50% or more of the voting rights, or appoints a majority of the directors) in a foreign company, prior notification may be required if that foreign company directly holds a specified threshold of shares (e.g., 50% or more for general investors) in a Japanese company engaged in a designated business sector.
This development is particularly relevant for startups operating through overseas holding structures (such as U.S. or Cayman parent companies), and investors should carefully assess whether their indirect acquisitions could trigger FEFTA requirements going forward.
Cases Where Prior Notification is Likely Required
Foreign startups should pay particular attention to the tech sector. While defense, nuclear power, telecommunications, and infrastructure are obvious areas, businesses involving cybersecurity, data processing, software-related activities, advanced materials, and supply chains for critical materials may also require consideration of notification. Even if a startup views itself as a “pure SaaS company,” “AI company,” or “development contractor,” its activities may be perceived differently in relation to Japan’s designated industries.
Summary
For foreign startups pursuing investment or business partnerships in Japan, the FEFTA is not an “exceptional special regulation” but a fundamental issue that should be confirmed from the early stages of a deal. Particularly for investments in unlisted companies, acquisitions of 1% or more of listed companies, involvement in designated industries, or investments involving director nomination rights or consent rights for important matters, it is crucial to determine the necessity of prior notification early on.
To achieve a successful market entry in Japan, it is crucial to proactively address FEFTA compliance in parallel with investment contract negotiations. By resolving these matters early, it is entirely possible to balance speed of market entry with full compliance.
GVA Global Law Office can provide optimal advice tailored to your company’s specific circumstances. When considering entering the Japanese market, please consult with GVA Global Law Office.
