Investment regulation - Japan
Investment restrictions
Direct investment report under the Foreign Exchange and Foreign Trade Law
Under Articles 27 and 55-5 of the FEFTA (amended effective 8 May 2020 with full implementation from 7 June 2020), a foreign investor (see definition and illustration below) who acquires 1% or more of outstanding shares or voting rights of a Japanese listed company of Designated Industry by Japanese authorities, must file a report. However, no threshold applies to acquiring shares of unlisted companies.
Even if the shareholding per beneficial owner does not exceed the threshold, foreign discretionary investment managers must file the report when an aggregate shareholding exceeds 1% of the issued shares or voting rights of a listed company.
In principle, this report can be filed after the event, by the 15th of the following calendar month of the actual investment. However, if the company is in a certain industry (for example, the “Core Designated Industry” such as defence and nuclear) or has investments from some countries (such as Iraq or North Korea), prior approval from the competent authorities is required one (1) month prior to the actual investment (the report can be accepted by the Bank of Japan six (6) months before the actual investment).
Notwithstanding, prior-approval is exempted for investment that is deemed to pose no risks to national security and meet certain conditions, while post reporting is required and the government may issue a recommendation or an order if they find it does not meet the conditions.
Furthermore, a post-investment report for non-designated industry is also required when acquiring 10% or more of outstanding shares or the voting rights of Japanese listed or unlisted companies.
Reports must be submitted to the Minister of Finance and other competent ministers via the Bank of Japan, normally through the local representative of the underlying investor.
Custody of book-entry Japanese Government Bonds (JGB)
Foreign financial institutions acting as intermediaries, for example, global custodians are required to obtain status of:
- Account Management Institution (AMI);
- Foreign Indirect Participant (FIP).
If the underlying end-investor is to be eligible for withholding tax exemption, the foreign intermediary must obtain the status of a Qualified Foreign Intermediary (QFI) for JGBs in addition to FIP.
Note: Every custodian chain should be pre-approved by the BOJ even if a financial institution has an FIP status.
Custody of book-entry Japanese Corporate Bonds and Convertible Bonds
If a foreign end-investor would like to receive tax exemption under the Special Measures on Taxation (J-BIEM), they must open an account with a foreign financial institution, for example, global custodians, that are the following:
- Account Management Institution (AMI) (same status under FIP);
- Foreign Indirect Account Management Institution (FIAMI) per instruments;
- Qualified Foreign Intermediary (QFI) for Corporate Bonds.
Please be reminded that FIAMI status is approved by JASDEC for each custodian chain rather than an entity level.
Holding restrictions
Companies in certain industry sectors (for example, airlines, broadcasting, telecommunications)
Ownership by foreign shareholders is limited as stipulated in the laws governing each industry (either 20% or 33%). Foreign investors are able to acquire shares of issuing companies with Foreign Ownership Limit (FOL shares) even after the aggregate limit is reached. Specific entitlement calculation methodology applies for FOL shares. In the event that a FOL limit is reached (as of Record Date), a comparison of registered holding positions between two Record Dates will be done; and entitlements will be guaranteed for the lower position only. Should there be any increase in position, allocation of entitlement will be conducted by registrar via prorating methodology and lottery system.
Exceptions are Nippon Television Holdings, Inc (JP3732200005), Fuji Media Holdings, Inc (JP3819400007) and Japan Airlines Corporation (JP3705200008) for those companies, there may be cases where the number of voting rights for foreign investors would be reduced from previous record date, especially when total number of voting rights of Japanese residents are equal to, or become less than previous record date. For such cases, entitlement allocation of voting rights and dividend are made by proration (based on holding balance) to all existing foreign shareholders and therefore, entitlements at previous record date would not be secured. An example formula for FOL stocks with the limit 20% is as below.
Total voting rights of Japanese residents x 25%1 = maximum voting rights of foreign investors.
Please refer to “Equities with foreign ownership level (FOL)” under Settlement process. To forewarn investors that the aggregate limit in a particular company is about to be reached, JASDEC provides a daily indicative report of the Foreign Ownership Ratio for Foreign Ownership Limit (FOL). Details can be found on the JASDEC website.
Foreign investors holding more than 10% shares of a company which itself holds more than 10% of the voting rights of a broadcasting company and/or a telecommunications company are defined as “Foreign Indirect Investors”. The company holding the broadcasting and/or telecommunications shares within which the foreign investor is holding a higher stake than 10% is designated as “Foreign Affiliated Company”.
Such holding of an affiliated company may be taken into account in calculating the FOL and available room for foreign ownership registration may decrease.
Disclosure requirements
For details of the local domestic disclosure requirements, please refer to the Disclosure Requirements.
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1. Since ratio of voting rights of foreign shareholders should not exceed 20%, the total voting rights of Japanese residents should be more than 80%, thus voting rights of foreign investors should be equal to/or less than one fourth of 80% of voting rights of Japanese residents).