In brief

A series of regulatory reforms and policy shifts have reshaped Japan’s approach to foreign direct investment, signaling a more assertive stance on national security and economic resilience. From narrower exemptions and new core entity designations to sector expansions and call-in powers, we examine what these developments mean for global investors — and why even low-risk deals may now face closer scrutiny.

Evolving Foreign Exchange and Foreign Trade Act (FEFTA) enforcement

Over the past 12 months, Japan has stepped up scrutiny of inbound foreign investment, particularly in sensitive sectors, such as infrastructure, telecoms and high-tech industries. Authorities are applying the FEFTA with renewed intensity – a shift driven in large part by rising geopolitical tensions and growing concern over the security of critical supply chains. This trend mirrors broader global developments, most notably in the United States, where CFIUS has become increasingly assertive in reviewing foreign direct investment.

This shift in Japan shows no sign of slowing. A series of recent developments – examined below – suggests a regulatory environment that is likely to become more restrictive in the short to medium term, especially for investors seen as linked to foreign state interests or targeting strategic assets.

Under FEFTA, prior notification is required for foreign investments in companies operating in designated sectors deemed sensitive to national security. Other qualifying investments are subject to post-transaction reporting. While this framework has long been in place, recent reforms and enforcement patterns mark a clear evolution in Japan’s approach.

Tightening of the scheme allowing exemptions from prior notification obligations

Japan recently amended its scheme for exemptions from prior notification for inbound direct investment, with changes promulgated on April 4, 2025 and entering into force on May 19, 2025. The amendment introduces two key developments. First, it narrows the scope of exemptions available to investors deemed to be under the substantial influence – or effective control – of foreign governments. Second, it broadens the range of companies classified as “designated core business entities,” foreign investments into which are subject to mandatory pre-closing screening.

While the government has not publicly stated its reasoning, market observers suggest that the amendments reflect rising concern over minority shareholdings by Chinese investors in Japanese listed companies involved in sensitive sectors such as cloud computing and telecommunications infrastructure. The potential for such investors to access confidential information, including the locations of critical infrastructure assets, appears to have sharpened the focus on national security risks.

Limiting the scope of exemptions for certain investors

Prior to the amendments, foreign investors that were not owned or controlled by foreign governments could, under specific conditions – such as refraining from management participation – acquire up to 10% of listed companies in designated sectors without triggering a prior notification requirement. The new rules narrow this exemption regime considerably, introducing a tiered classification system that targets investors based on their relationship to foreign states.

Two categories of investors have been defined:

• Type A investors are those subject to foreign legal regimes that would, either explicitly or in practice, compel them to gather information for the benefit of a foreign government. These investors are now excluded from the exemption scheme altogether. Any acquisition of 1% or more of shares in a Japanese-listed company operating in a designated sensitive sector will require prior notification.
• Type B investors are not formally bound by such foreign laws but are considered to occupy a comparable position in practice. While they may still apply for exemptions, they face a high threshold to qualify. Notably, they are barred from using the exemption system when investing in “designated core business entities.”

The Japanese Ministry of Finance addressed several questions raised during its public consultation and has issued a Q&A to offer practical guidance – particularly for foreign financial institutions that previously enjoyed blanket exemptions but now fall under either the Type A or Type B classifications.

Nevertheless, uncertainty persists.

How these rules will be applied in practice, and how they will interact with existing exemption schemes remains unclear. In many cases, individual engagement with the authorities may be required to clarify the ongoing validity of prior arrangements.

Designated core business entities

FEFTA already distinguishes between designated and non-designated sectors, with foreign investments in the former requiring prior notification and approval. Within the designated group, certain core sectors are flagged as posing heightened security concerns. The amendments build on this framework by introducing a new category: “designated core business entities” – a designation that applies not to sectors, but to specific companies.

These entities are defined under the Economic Security Promotion Act as “specific social infrastructure operators” and include major players in power, transport, and telecommunications — sectors already within FEFTA’s core scope. Examples include Tokyo Electric Power Company, East Japan Railway Company, and NTT East.

This change is likely to affect market dynamics. Shares in infrastructure companies are typically attractive to foreign investors given their relative stability and reliable returns. But with the new rules in force, the regulatory burden attached to such investments has increased, particularly for investors previously able to operate under the radar. For those considering trades in these entities, the compliance calculus has become more complex.

Expansion of designated sectors

Beyond the most recent amendments, FEFTA has been subject to significant changes since 2023, reflecting Japan’s growing emphasis on national security and economic stability. The Ministry of Finance has annually expanded the list of designated sectors that trigger prior notification for inbound direct investments and has updated classifications of different listed companies.

This expansion is both incremental and strategic. In recent updates, sectors such as fertilizers, machine tools, storage batteries and semiconductor manufacturing equipment have been added to the list. These additions underscore Japan's strategic focus on securing critical supply chains and enhancing economic resilience. As a result, the perimeter of regulatory oversight is no longer defined solely by conventional notions of strategic sensitivity. Instead, the focus has widened to encompass sectors essential to the functioning of Japan’s broader industrial and innovation base.

Heightened scrutiny for western investors

The tightening of Japan’s foreign investment regime has not been limited to investors from countries typically viewed as geopolitical rivals. Western investors, too, are facing increased scrutiny under FEFTA, with regulatory inquiries extending well beyond the formal exemption categories. Recent experience suggests that Japanese authorities – including the Ministry of Economy, Trade and Industry and the Ministry of Health, Labour and Welfare – are taking a more expansive view of national security risks. In particular, western companies with significant R&D operations in China have encountered detailed questions about the potential for sensitive information to flow offshore.

This approach mirrors the rationale underlying CFIUS reviews in the United States, which increasingly focus on limiting the flow of strategic commercial data to jurisdictions deemed high risk. For western firms, the implication is clear: a strong operational footprint in China may trigger closer scrutiny in Japan, even if the investing entity is otherwise considered low risk.

Increasing risk of call ins

As the list of designated sectors continues to expand, Japanese authorities appear increasingly willing to use their discretionary powers to call in transactions for review – even where formal thresholds or sector classifications are not clearly met. This shift reflects both a more assertive regulatory posture and growing dissatisfaction with the static nature of the designated sector list, which is sometimes criticized for lagging behind emerging national security concerns. The call-in mechanism provides a safety net for regulators, enabling them to scrutinize transactions that might otherwise evade prior notification obligations.

The healthcare sector offers a case in point. Policymakers have expressed concern over Japan’s reliance on imported medical and biotechnological products, particularly from China, highlighting the vulnerability of supply chains in the event of geopolitical shocks. Even where specific products or technologies are not formally designated as sensitive, the sector is likely to attract heightened attention from FDI reviewers.

Japan’s FDI playbook just got more complex

A more public example involves the proposed acquisition of Seven & I Holdings by Canadian-based Alimentation Couche-Tard. While ostensibly a consumer transaction, the deal has triggered debate about the national security implications of foreign ownership of Japan’s ubiquitous convenience stores – viewed by some as essential elements of the country’s social infrastructure. In a notable development, Seven & I Holdings’ operations were reclassified from regular designated to core designated status shortly after news of the deal emerged, bringing them under closer regulatory scrutiny.

Together, these developments underscore the increasing unpredictability of Japan’s FDI review landscape. Investors can no longer rely solely on sector designations to assess regulatory risk; a more nuanced understanding of political, economic and social sensitivities is now essential.

Key takeaways

• Fewer exemptions, more questions. Recent reforms have narrowed the exemption regime – especially for investors linked to foreign states – making early regulatory engagement essential.
• New classifications mean new obligations. Investments in “designated core business entities” now face heightened scrutiny, even in sectors traditionally seen as stable or low-risk.
• Sector scope is expanding fast. Japan’s list of sensitive industries now includes areas like semiconductors, machine tools, and fertilizers – broadening the regulatory net for inbound deals.
• Western investors aren’t immune. Operational ties to China or involvement in R&D may trigger enhanced review, even for investors from traditionally trusted jurisdictions.
• Expect greater use of call-in powers. Authorities are increasingly using discretion to review deals outside formal sector triggers – making political and social context a growing factor in FDI risk assessments.

With thanks to Freshfields Kaori Yamada, Laurent Bougard and Hitoshi Nakajima for contributing to this update.