On August 19, 2024, major Japanese retailer Seven & i Holdings announced that it had received a takeover offer from Alimentation Couche-Tard, a leading Canadian retail chain. If approved, the acquisition would create the world's largest retailer.
Then in September 2024, Japan's Ministry of Finance announced that Seven & i Holdings operates in a "core sector" under the Foreign Exchange and Foreign Trade Law. This designation requires foreign buyers to provide advance notification of any acquisition and undergo a national security examination to identify risks and gaps, which could lead to the termination of the transaction or impose other requirements on the foreign investor.
While these regulatory measures may complicate acquisitions, they also highlight Japan's increasing focus on economic security and the evolution of its regulatory framework.
Japan's foreign investment regulations have undergone significant changes. Under the revised law, implemented in May 2020, foreign investors who acquire more than one percent of shares in listed companies in designated sectors must provide prior notification and undergo the screening process.
In December 2022, as part of the Economic Security Enhancement Act, Japan introduced the concept of "vital products," which are seen as essential to public welfare and the domestic economy, such as machine tools, industrial robots, and semiconductors. Industries related to these products are subject to investment screening.
These developments show that the government has broadened its perception of economic security challenges related to inbound FDI. While it previously focused on direct risks, such as the erosion of defense industrial bases or military applications of technology, it has begun to include indirect risks, such as data leaks and economic vulnerabilities, in its screening process.
But while the targets of inward direct investment screening have expanded to include a variety of companies, such as retailers and technology companies, the methods of investment screening have not been updated to fit the new reality.
Japan's approach emphasizes strict entry regulations through prior notification requirements. These case-by-case reviews often introduce uncertainty for foreign investors, which may discourage direct investments aimed at global expansion through the Japanese market.
At the same time, Japan's efforts to monitor the evolving risks of foreign ownership are very limited once investments are completed. For example, when Tencent, a major Chinese technology company, invested in Rakuten, a Japanese e-commerce and financial platform, the Japanese government imposed conditions to prevent Tencent from accessing confidential data. While Japan, in coordination with the United States, monitored this investment due to concerns about potential data leakage to China, the effectiveness of this monitoring and its ability to prevent unauthorized access to data remains unclear.
Another challenge arises from the fact that in complex shareholding structures, a privately owned company based in a jurisdiction that does not pose a significant economic risk to Japan may be affected through ownership stakes. Such companies could be owned by sovereign wealth funds and strategic partnerships with third-country state-owned enterprises, or have significant business interests in jurisdictions where such risks may exist.
Future changes in ownership and exposure to third-party influence may alter the economic security implications of foreign acquisitions deemed acceptable at the time of completion. This highlights the need for robust post-transaction risk management.
Both the United States and the European Union have adopted measures to enhance the effectiveness of investment regulations. In the US, authorities have the power to authorize exits if national security risks are identified after the investment. Similarly, the EU introduced foreign subsidy regulations in 2023, which require transparency in subsidies and funding sources for transactions involving state-owned enterprises to ensure fairness and competitive integrity.
These measures aim to address economic and security concerns and protect domestic markets more effectively by balancing pre- and post-transaction security considerations. But Japan's implementation of foreign subsidy regulations requires more transparency.
These measures aim to address economic and security concerns and protect domestic markets more effectively by balancing pre- and post-transaction security considerations. However, Japan's implementation of screening and surveillance activities has often been limited to ad hoc responses. While all of these screening methods impose significant hurdles and unpredictability on foreign investors, Japan's current system is less effective in addressing the changing nature of economic security challenges.
Japan would benefit from improving the effectiveness and transparency of investment regulations. Clearer screening criteria, along with more accessible guidance and examples, may put foreign investors at ease. There would also be benefits to revisiting post-transaction monitoring and enforcement mechanisms.
The "narrow scope, high walls" approach may be effective. This strategy would focus on dual-use military and civilian technologies and competitive sectors critical to Japan's economic growth, ensuring strict monitoring of these areas while encouraging investment in less critical sectors. In addition to robust entry screening, continuous monitoring would deter improperly motivated investments and enable timely interventions when necessary. Such measures would minimize economic security risks while fostering a healthy investment environment that supports Japan's global competitiveness.
Ayaka Hiraki is a research fellow at Deloitte and a doctoral student at Keio University in Tokyo.
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