Amendment to Japanese Foreign Exchange and Foreign Trade Act expands restricted business sectors for foreign investment in Japan

By:

Overview

The Japanese Foreign Exchange and Foreign Trade Act (the FEFTA) requires prior filings with relevant ministries via the Bank of Japan for foreign investments in certain business sectors relating to national security, public order, and public safety, etc. (Restricted Business Sectors). The recent amendment to the FEFTA expanded the scope of the Restricted Business Sectors, adding the following sectors relating to information and communication technology (ICT) (Additional Restricted Business Sectors):

(i) Manufacture of devices and components related to information processing

  • Manufacture of integrated circuits
  • Manufacture of semiconductor memory media
  • Manufacture of optical discs, magnetic tapes and discs
  • Manufacture of electronic circuit implementation boards
  • Manufacture of cable communication equipment
  • Manufacture of mobile phones and PHS
  • Manufacture of radio communication equipment
  • Manufacture of computers, except personal computers
  • Manufacture of personal computers
  • Manufacture of external storage devices

(ii) Production of software related to information processing

  • Custom software development services
  • Embedded software services
  • Packaged software services

(iii) Telecommunications services

  • Regional telecommunications, except wired broadcast telephone services *
  • Long-distance telecommunications *
  • Cable broadcast telephone services
  • Miscellaneous fixed telecommunications *
  • Mobile telecommunications *
  • Data processing services
  • Internet user support services *

* Categories existed before the amendment, but the scope has been expanded

This amendment is attributable to the Japanese government's concern over the leakage of crucial technologies relating to national security and defence.

Implication on Foreign Investment in Japan

There is a 30-day waiting period for investments that require a prior filing under the FEFTA. In practice, the waiting period is frequently shortened to two weeks. However, it may be extended up to 5 months if any relevant ministries determines a need for a more comprehensive review.

Accordingly, foreign investors considering investing in ICT sectors are required to confirm whether a prior filing pursuant to the FEFTA is necessary for such investments. The determination of whether a given business operation of a target company falls within one of the Additional Restricted Business Sectors is fact-specific. However, given the Additional Restricted Business Sectors are defined broadly, it may be advisable to consult with relevant ministries informally at an early stage to confirm whether a prior filing is required to avoid any delays and negative impacts on the investment.

Effective Date of Amendment

The amendment came into effect as of 1 August 2019. However, the prior filing requirements for foreign investment in the Additional Restricted Business Sectors will only apply to investments implemented on or after 31 August 2019.

Other Notes

It should be noted that even if a prior filing is not required for certain foreign investments, it could still be subject to a post-transaction report to the relevant ministries via the Bank of Japan. In general, however, post-transaction reports are not scrutinized by the Japanese government.

This alert does not cover the complex rules on determining whether an investment is subject to FEFTA restrictions set out under the act. We recommend potential investors to seek professional legal advice to confirm whether a proposed investment is subject to any restrictions under the FEFTA, including the prior filing requirements.