Japan Moves to Limit Foreign Investment in Half of Listed Firms

(Bloomberg) -- Japan detailed an array of companies that will be subject to new rules restricting foreign investment, moving to protect industries it says are core to national security from the influence of foreign state interference.

The Foreign Exchange and Foreign Trade Act requires some foreign investors to report in advance when they plan to buy a more than 1% stake in the designated firms, versus a previous threshold of 10%. The steps add restrictions to investments in more than half the listed companies in the country, though a series of blanket exemptions apply for registered investors, including most financial and asset management firms.

The list announced on Friday groups companies into one of three categories:

• those exempt from the restrictions entirely
• a group of around 500 companies operating in so-called core industries including nuclear power and defense
• a broader group of more than 1,500 companies in non-core industries including broadcasting and transport, subject to less stringent rules.

The law came into force on Friday with full implementation set to begin on June 7 after a 30-day transition period. Blue chips such as Toyota Motor Corp., Sony Corp. and SoftBank Group Corp. are part of the group operating in core sectors, while the likes of Nintendo Co. and Fanuc Corp. make the the broader, “non-core” list.

Japan has said the legislation is necessary to protect national security and likened it to recent laws in the U.S. Critics have contended the moves will limit activist investing and foreign influence at a time when Japan has been trying to promote its equity markets.

Seth Fischer, the founder and chief investment officer of Hong Kong-based Oasis Management Co., said the law wouldn’t change how his hedge fund operates.

“It’s clear Japan remains open to foreign shareholders,” Fischer said in a statement. “The blanket exemptions here for foreign financial firms and asset managers make that indisputable. This change in law has not necessitated a change in our approach or our bullish view on the increasingly shareholder-friendly environment in Japan.”

Sun Corp., where Oasis won a victory last month, and concert venue operator Tokyo Dome Corp., another target, are both listed among the core sectors, as is Shibaura Machine Co., formerly known as Toshiba Machine, a target of controversial activist investor Yoshiaki Murakami.

Broad Exemptions

The market impact of the legislation is “relatively limited” despite the list making up around 40% of the market capitalization of the Topix, Goldman Sachs’ Kathy Matsui, Hiromi Suzuki and Kazunori Tatebe wrote in a report.

“While foreign activists may regard the amendment as an additional burden to their investment process, we do not believe the amendment itself will halt such investors from engaging with Japanese companies,” the report said, cautioning that there was “some near-term risk of foreign liquidations in cases where there is incomplete understanding of the amendment itself and the rationale behind it.”

The legislation includes a large number of exemptions added after criticism of early drafts of the bill, meaning the rules don’t apply to the likes of banks, asset managers, hedge funds and high-frequency traders registered with the Financial Services Agency -- provided these entities comply with conditions aimed at limiting their influence on management, including not becoming board members of the company or proposing asset sales.

The steps are most likely to target foreign state-owned enterprises, with Chinese investment in the country a particular source of concern. Japan has said sovereign wealth funds that “pose no risk to national security” can also get an exemption, provided investment decisions are made without government interference.

“China will have been on their minds” in drafting this legislation, said Yuki Kanemoto, senior researcher at Daiwa Institute of Research. “But most sovereign wealth funds are likely to be independent of their governments.”

A number of companies whose relevance to national security was less obvious also made the lists, from Tokyo Disneyland operator Oriental Land Co. to secondhand golf store chain Golf Do Co.

Fumio Matsumoto, chief strategist at Okasan Securities Co., says while electronic and precision makers were expected to be on the list, “there was more small-and-mid cap stocks on the list than expected, and it’s hard to see the reason why they are there.”

‘Perplexing’

“It’s also perplexing that some companies in the same industry are exempt while others are not,” he said, noting that while Toyota and Honda Motor Co. were on the list, Nissan Motor Co. was not.

The legislation also gives a framework for Japan to quickly protect industries of national concern, with Fujifilm Holdings Corp., the maker of potential coronavirus treatment Avigan, already on the core list. Two more companies involved in the production of the drug, which Japan has been promoting internationally as a virus treatment despite its efficacy still being unclear, will also be added, the Yomiuri newspaper reported Monday.

Some 1,698 companies in industries not directly related to national security are entirely exempt from the reporting requirements, including firms in retailing, food, and finance.

©2020 Bloomberg L.P.