Tokyo: Japan is preparing a sweeping revision of its foreign investment law to sharpen national security screening and close loopholes that have allowed indirect foreign control of domestic firms. The move comes amid mounting global concern over economic security, technology transfer, and the protection of critical infrastructure from strategic foreign influence.
The proposed reform targets the Foreign Exchange and Foreign Trade Act (FEFTA), Japan’s principal law governing foreign investments. The Ministry of Finance (MoF) has confirmed that work on the revision has already begun and draft legislation could be submitted to the next ordinary session of Parliament.
The FEFTA was last updated in 2019, when Japan drastically lowered the threshold for mandatory pre-approval of foreign equity acquisitions in sensitive sectors from 10 percent to just 1 percent. That change led to a dramatic rise in the number of filings, from roughly 500 annually before 2020 to more than 2,000 per year since the amendment.
According to Vice-Finance Minister Atsushi Mimura, the new reform aims to refine the process so that the system can focus on genuine security risks without burdening investors engaged in non-sensitive sectors. “We are reviewing how to make the screening more targeted and effective,” he said, adding that the goal is not to discourage investment but to ensure Japan’s strategic assets remain protected.
The proposed revision seeks to clarify which sectors fall under “national security-sensitive” categories, particularly within the information technology and software domains. At present, more than half of all investment-screening cases involve IT service providers, many of which do not directly deal with sensitive data or infrastructure.
The new plan intends to narrow this focus to companies that handle critical cybersecurity, defense-related technologies, or national infrastructure systems. This refinement, officials say, will prevent unnecessary bureaucracy while preserving Japan’s openness to legitimate foreign capital.
In addition, the government plans to close existing loopholes that have allowed certain investments to bypass scrutiny. For instance, under current rules, a foreign government or non-resident entity could indirectly gain control of a Japanese company by using a domestic proxy investor an arrangement that may not trigger a mandatory review under FEFTA. The updated law will ensure such indirect acquisitions are also subject to national security screening.
Tokyo is also weighing the establishment of a U.S.-style Committee on Foreign Investment in the United States (CFIUS) mechanism. This proposed inter-agency body would bring together key ministries including finance, defense, trade, and communications to coordinate and assess high-risk investment cases in a unified manner.
The model aims to create faster, more informed decision-making while maintaining transparency in how foreign investments are evaluated. This marks a potential structural shift in how Japan enforces its economic security policies.
Japan’s renewed focus on investment screening reflects a broader global movement to safeguard strategic sectors from geopolitical risks. Governments in the United States, European Union, Australia, and South Korea have already tightened oversight of foreign investment in sensitive industries such as semiconductors, defense equipment, artificial intelligence, and advanced materials.
For Japan, which relies heavily on foreign investment and international supply chains, balancing economic openness with national security is a delicate act. The rise in cyberattacks, technological espionage, and concerns about critical data exposure have further underscored the urgency of reform.
Foreign investors, particularly those engaged in high-tech manufacturing, digital infrastructure, and research & development, are likely to face more rigorous screening under the new framework. While the process may become more time-consuming, officials have emphasized that Japan remains committed to maintaining a fair, transparent, and predictable investment environment.
To offset potential delays, the MoF is expected to introduce clearer guidelines, streamlined review timelines, and differentiated risk categories that would enable low-risk investments to be approved more swiftly.
Prime Minister Sanae Takaichi, known for her hawkish stance on national security, has made protecting Japan’s technological sovereignty a key policy pillar. The planned FEFTA amendment fits within her broader economic security agenda, which also includes safeguarding supply chains, promoting domestic chip production, and reducing reliance on foreign critical technologies.
While the proposed law aims to modernize Japan’s investment regime, challenges remain. Defining the precise boundaries of “critical sectors” will be crucial to prevent overreach that could deter genuine investors. Similarly, coordination among ministries often siloed in Japan’s bureaucratic structure will determine the efficiency of implementation.
Internationally, Japan’s tightening of investment rules may influence other countries in Asia to follow suit, particularly as strategic competition in the Indo-Pacific intensifies. For global investors, the move signals that national security considerations are increasingly shaping economic policy, even in traditionally open markets.
In essence, Japan’s decision to sharpen its foreign investment laws marks a significant turning point in its approach to economic security. As Tokyo seeks to shield its industries from strategic vulnerabilities while retaining its status as a global investment destination, the coming months will test how effectively it can balance vigilance with vitality in an era of intensifying geopolitical rivalry.