Navigating Japan's foreign investment rules: Key requirements and the 2026 reform update

On 5 June 2026, amendments to the Foreign Exchange and Foreign Trade Act were promulgated, further enhancing Japan's foreign direct investment screening regime.

The Foreign Exchange and Foreign Trade Act of Japan (the "FEFTA") constitutes the primary legislative framework governing foreign direct investment (the "FDI") in Japan. In recent years, the regulatory landscape surrounding FDI has evolved significantly. Notably, amendments that came into effect in 2020 lowered the shareholding threshold triggering a prior notification requirement for acquisitions of shares in listed companies from 10% to 1%. Subsequent developments in 2023 and 2024 further expanded the scope of designated business sectors subject to prior notification requirements, with the aim of strengthening national security, ensuring supply chain stability, and preventing technology leakage and military diversion. In 2025, an additional category of foreign investors—those obligated to cooperate with the intelligence activities of a foreign government—was introduced and became ineligible for exemption from the prior notification, further reinforcing national security safeguards. Most recently, the Diet passed a further amendment to the FEFTA aimed at further enhancing the FDI screening regime. This amendment was promulgated on 5 June 2026 and is expected to come into force within one year of its promulgation.

It should also be noted that, in April 2026, the government blocked an acquisition contemplated by an Asia-based PE fund due to national security concerns, which is the second case that has been officially confirmed following another precedent in 2008.

To ensure a successful investment in Japan while fully complying with applicable FDI regulations, it is crucial for Foreign Investors (see Q1) acquiring or holding shares in Japanese companies to understand when and what proceedings are required in connection with the acquisition of a Japanese company's shares¹ or engaging in shareholder activities.  Failure to comply with FEFTA may potentially result in a Foreign Investor being ordered to dispose of their acquired shares and may subject the Foreign Investor to imprisonment or fine.  

Set out below are some frequently asked questions regarding foreign investment controls in Japan and the application of the FEFTA to non-Japanese investors, with a particular focus on acquisition of shares in private companies.²

Q1 What is the definition of a "Foreign Investor"?

It is important to note that the requirement to file a prior notification (or, if applicable, submit a post-facto report) when engaging in an FDI may apply to any individual or entity which is deemed a Foreign Investor under the FEFTA. 

The FEFTA typically defines "Foreign Investor" as any of the following:

    (i)    non-Japan resident individuals;

    (ii)    companies or other organisations formed under the laws of a jurisdiction other than Japan (foreign organisations);

    (iii)    Japanese companies, of which 50% or more voting rights are, directly or indirectly, held by non-Japan resident individuals or foreign organisations;

    (iv)    partnerships, if either of the following is met: (a) 50% or more contributions to the partnership were made by Foreign Investors; or (b) the majority of general partners are Foreign Investors; or

    (v)    companies of which the majority of directors or other officers, or the majority of directors or other officers with representative authority, are non-Japan resident individuals. 

Thus, as a first step, when engaging in an FDI, investors should determine whether they fall within the definition of a Foreign Investor.

Q2 Does a limited partnership formed under the laws of a jurisdiction other than Japan fall into the definition of "Foreign Investor"?

A limited partnership or other partnership formed under the laws of a jurisdiction other than Japan, whose assets are jointly owned by its limited partners under the laws of its home jurisdiction, shall fall within the scope of Foreign Investors (as a partnership described in Q1(iv)), if either of the following conditions is satisfied: (a) 50% or more of the contributions to the partnership was made by Foreign Investors; or (b) majority of the general partners are Foreign Investors.

Such foreign limited partnerships that satisfy neither condition (a) nor (b) above would not be regarded as Foreign Investors and, accordingly, would not be required to file a prior notification or submit a post-closing report under FEFTA.

On the other hand, where a foreign limited partnership itself owns its fund assets under the laws of its home jurisdiction, such foreign limited partnership falls within the scope of Foreign Investors (as a foreign organisation described in Q1(ii)). In this case, the foreign limited partnership may be required to make a prior filing or submit a post-transaction report regardless of the composition or characteristics of its investors or general partners.

Q3 When and what proceeding is required in connection with "Foreign Direct Investments"?

Share acquisition is the most typical form of FDI. However, FEFTA defines other shareholder activities as FDIs, including, but not limited to, granting consent to substantial changes in businesses and extending loans of more than JPY 100 million to a Japanese company. It should be noted that, in the event of an appointment of a related party as an officer of the target company, a separate prior notification may be required, even if the Foreign Investor has already submitted a prior notification in connection with its acquisition of shares in the same company.

The required proceedings would depend on what business the target company conducts. If the relevant company engages in any "Designated Business"(see Q6), the Foreign Investor shall be required to file a prior notification in connection with the FDI, unless an exemption applies. Once the FDI is concluded, the Foreign Investor that has filed the prior notification must also submit a post-closing report within 45 days from the closing.

On the other hand, if the target company only conducts "Non-Designated Business" activities, the Foreign Investor may only need to submit a post-facto report.

Q4 How long after the filing of a prior notification can a Foreign Investor conclude a transaction? 

When a Foreign Investor has filed a prior notification, there is generally a 30-day waiting period from when the regulatory authority has accepted the prior notification. However, the waiting period may be extended to a maximum of 4 months (if a hearing is necessary, maximum 5 months) if the regulatory authority considers that a careful review is necessary from the viewpoint of national security or public welfare.

Once the clearance has been obtained, the Foreign Investor may complete the transaction at any time within 6 months from the date on which the prior notification has been accepted.  

Q5 What procedures are required when acquiring shares of a Japanese company?

As a default rule, the Foreign Investor is required to file a prior notification³ if a foreign investor acquires shares in a private company (including its Japanese subsidiaries and joint ventures with 50% or more voting rights) engaging in any Designated Business.

The Foreign Investor which filed a prior notification is also required to submit a post-closing report within 45 days of the closing of the share acquisition in either case. Further, another submission of a report within 45 days of the transaction would be required when disposing of the shares for which the prior notification was filed at acquisition. The Foreign Investor should keep this requirement in mind as such disposal may occur several years after the acquisition of the shares.

Q6 What is a Designated Business and a Core Business?

Business sectors that are considered important from the perspectives of national security, public welfare, economic security, and preservation of traditional industries – such as software development services, the production of hazardous materials, utility-related industries, and agriculture, forestry and fisheries - are typically categorised as Designated Businesses.

Core Businesses constitute a subset of Designated Businesses and comprise industries which are considered particularly critical from a national security perspective. These include, for example, manufacture of weapons, the manufacture of integrated circuits or semiconductor memory media, and software development services related to cyber security or the collection of sensitive personal information often fall into the scope of a Core Business. Where a Foreign Investor acquires shares in a Japanese non-listed company conducting any Core Business, the Foreign Investor cannot rely on the Exemption (see Q7) from the requirement to file a prior notification.  

Q7 Is there any exemption from prior notification filing obligation?

If the target company is a non-listed company that does not conduct any Core Business, a Foreign Investor may rely on the exemption ("Exemption") if such Foreign Investor complies with the following exemption conditions (the "Exemption Conditions"):

    (i)    the Foreign Investor, including its related parties, shall not assume any director or any other officer role of the target company;

    (ii)    the Foreign Investor shall not make, or have someone make, a proposal regarding transfer or termination of the target company's business which falls into the category of a Designated Business during any shareholders' meeting; and

    (iii)    the Foreign Investor shall not access any non-public technical information relating to the business falling into the category of a Designated Business. 

Please note, however, that a Foreign Investor relying on the foregoing exemption from the requirement to file a prior notification shall still be required to submit a post-facto report within 45 days from the acquisition of shares in the target company.

Q8 Can any Foreign Investor rely on the Exemptions?

FEFTA sets forth certain categories of Foreign Investors which are disqualified from relying on the Exemption, which includes, among others, governments, governmental organisations, central bank or policy parties of a foreign country ("Foreign Governments"), as well as Foreign Governments affiliated entities.⁴ Such investors are disqualified from, and therefore may not rely on, the Exemption.

In addition, "Specified Foreign Investors" (tokutei gaikou toshika) was added to the category of the disqualified foreign investor in 2025,⁵ in order to strengthen oversight over the collection of intelligence information by Foreign Governments. Specified Foreign Investors mean persons, or companies or other organisations obligated to cooperate with information collection activities conducted by Foreign Governments pursuant to contracts with such Foreign Governments, or based on laws and regulations in foreign countries.  

The disqualified Foreign Investors, including Foreign Governments, Specified Foreign Investors, and Specified Foreign Investors affiliated entities,⁶ may not rely on the Exemptions and must always file a prior notification when acquiring shares of a Japanese company conducting any Designated Business.

Q9 Is any proceeding required when acquiring the business of a Japanese company?

With respect to acquisition of a business from a Japan resident entity by way of a business transfer, demerger (i.e., spin-off), or merger (other than in the form of share purchase of a Japanese company) by a Foreign Investor, a prior notification is required if the business falls under the definition of a Designated Business, and a post-facto report is required if it is not a Designated Business. 

Q10 Is any proceeding required when acquiring options or convertible bonds?

With respect to the acquisition of options, neither a prior notification nor a post-facto report is required. However, when acquiring convertible bonds, a prior notification or post-facto report may be required if certain requirements are met, such as, among others, the redemption period exceeds one year, and the balance of the bond after the acquisition exceeds JPY 100 million.

Q11 Is any proceeding required when converting options or convertible bonds to ordinary shares?

In cases where stock acquisition rights or bonds are converted to ordinary shares, a Foreign Investor may be required to file a prior notification or submit a post-facto report. It should be noted that neither prior notification nor a post-facto report is required if the target company exercises a call right⁷ attached to such stock acquisition rights or convertible bonds and the Foreign Investor acquires ordinary shares as consideration.

Q12 Is any proceeding required when appointing a director?

If the target company conducts a Designated Business, a Foreign Investor has to file a prior notification when voting for the appointment of a person in close relationship with the Foreign Investor (defined in detail under the FDI regulations, which includes directors, family members, a person or entity who agrees to vote in consortium with the Foreign Investor) as a director of the target company. This requirement applies even if the Foreign Investor has filed prior notification when acquiring shares of the target company.

However, no prior notification needs to be filed in connection with a director appointment, if:

    (i)    the Foreign Investor has filed a prior notification when acquiring shares of the target company; and

    (ii)    the Foreign Investor holds 50% or more of the voting rights of the target company.

Q13 If a Foreign Investor, through its fully owned subsidiary ("Buyer SPC") acquired a Japanese company ("Target Company"), and after the completion of the acquisition, the Foreign Investor is planning to merge the Target Company and Buyer SPC, what procedures may be required under FEFTA?

For the purposes of this analysis, the assumption is that (i) the business purpose of the Buyer SPC is controlling business activities by holding shares; and (ii) after the acquisition, the Target Company will be a wholly owned subsidiary of Buyer SPC.

A. When Buyer SPC, as the surviving company, merges with Target Company as the merged company

Both Buyer SPC and Target Company are Foreign Investors because more than 50% of the voting rights are, directly or indirectly, held by the Foreign Investor. Therefore, the following analysis is necessary:

    (i)    whether a prior notification or post-facto report by Buyer SPC is required in connection with the succession of business from Target Company as a result of the merger; and

    (ii)    whether a prior notification or post-facto report by the Foreign Investor is required in connection with a substantial change in business purpose of Buyer SPC (this would be on the assumption that Buyer SPC will have to change its business purpose in order to accept and engage in the business succeeded from Target Company).

If Target Company conducts any Designated Business:

    (i)    Buyer SPC must file a prior notification in connection with the succession of business from Target Company as a result of the merger; and 

    (ii)    the Foreign Investor shall file a prior notification in connection with consent for the substantial change in business purpose of Buyer SPC.⁸

If Target Company only conducts a Non-Designated Business:

    (i)    Buyer SPC must submit a post-facto report in connection with the succession of business from Target Company; and

    (ii)    with respect to the consent for the substantial change in business purpose of Buyer SPC, neither prior notification nor post-facto report is required because the change of business purpose does not relate to a Designated Business.

B. When Target Company, as the surviving company, merges with Buyer SPC, as the merged company

As Buyer SPC conducts only a Non-Designated Business, a post-facto report by Target Company would suffice in connection with the succession of business from Buyer SPC. Also, an amendment to the articles of incorporation of Target Company would not be necessary.

It should be noted that, in cases where Target Company is the surviving company, the Foreign Investor may acquire shares of Target Company as merger consideration, which may require the Foreign Investor to file a prior notification or submit a post-facto report depending on what business the Target Company engages in and whether any exemption is available.

Q14 What penalty may be imposed for failing to file a prior notification?

A Foreign Investor that engages in any FDI in violation of its prior notification obligations or consummating any FDI during the waiting period before obtaining clearance after filing the prior notification may be ordered to dispose of all or part of the acquired shares or otherwise take required measures. Furthermore, the Foreign Investor may ultimately be subject to imprisonment for a maximum of three years and/or a fine of up to JPY 1 million.⁹

Q15 What are the changes to the FEFTA proposed in 2026?

In May 2026, another amendment of the FEFTA was passed. This amendment is designed to further enhance the Japanese FDI regulations.  Based on the information currently available, the amendment proposes the following changes:  

    (i)    expand the scope of FDI to certain indirect acquisitions by Foreign Investors - when a Foreign Investor acquires 50% or more of the voting rights in a non-Japanese entity which invests in Japanese companies, such acquisition will fall within the scope of FDI;

    (ii)    if any risk mitigation measures will be taken to address national security concerns, they should be explained in the prior notifications, and in case the reported mitigation measures are to be changed, such changes should be reported to the government before implementing the changes; 

    (iii)    in case an FDI is made through another person acting for a Foreign Investor (e.g. based on contracts between such person and the Foreign Investor), such person will be deemed to be a Foreign Investor for the purpose of FEFTA application;

    (iv)    in case an FDI may cause significant risk to national security due to changes in international circumstances or other reasons in the future, the government may require a Foreign Investor to report such FDI, even if it does not trigger the prior notification obligation, and the government may request or order the Foreign Investor to dispose of the shares in Japanese companies in case the government considers there is significant national security risk concerns; and

    (v)    mandate the Minister of Finance and the competent Minister to seek views from the heads of other relevant administrative agencies where necessary for the FDI review.

The amended FEFTA will come into effect within one year counting from its promulgation on 5 June 2026, following the issuance of subordinate legislation setting out the detailed requirements.

Conclusion

The foregoing is an overview of the key features of the Japanese FDI regulations under FEFTA and its implementing regulations. However, as described above, the requirements for each FDI activity, as well as the different types of exemptions in connection with such activities, can be complex. Therefore, it is vital for Foreign Investors planning to acquire shares of Japanese companies, or intending to engage in any shareholder activities, to consult with their legal advisors well in advance of conducting such activity to determine if such activity is regulated by FEFTA and the Foreign Investor is subject to any notification or reporting requirements thereunder.

If you have any questions on this topic, please get in touch with your usual Withers contact or the authors of this article.