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Japan looks to enhance scrutiny of defence FDI

Japan is considering a move to further tighten regulations on foreign direct investment (FDI) in strategic-technology areas including defence. The potential move, which could be introduced within the next few months, is aimed at strengthening the protection of indigenous technologies.

According to a government proposal, the new regulations would address loopholes in current FDI rules through which foreign investors can place technology-transfer demands on Japanese firms.

Local news reports suggest that the proposal would enable the government to scrutinise any potential technology-transfer activity even after foreign firms have completed their investments. Countermeasures for non-compliance could include forcing foreign investors to sell off shares in Japanese companies.

The proposal, which will likely require approval from the Ministry of Finance (MOF) before implementation, will be Tokyo's second initiative to increase the scrutiny of defence-sector FDI since June 2020 when it fully implemented the amended Foreign Exchange and Foreign Trade Act (FEFTA). The law is centred on a requirement for foreign investors to increase the frequency in which they submit “prior notifications” about their FDI proposals to the MOF and other ministries.

If, following prior notification, the investment is deemed a risk to national security the investor would be forced to terminate the FDI proposal.

The updated FEFTA sets no “upper limit” on FDI in national security sectors but does require investors to comply with a series of conditions, including the requirements for prior notifications.

A key aspect of the amended law includes the lowering of the threshold for prior notification of FDI proposals from 10% of a company's equity to 1%, and the requirement for prior notification in cases of mergers or demergers or FDI through partnerships.

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