Guide to the Prior Notification System for Foreign Investors

Regulations on Inward Direct Investment Under the Foreign Exchange Law

• Under the Foreign Exchange and Foreign Trade Act (Foreign Exchange Law), foreign investors must submit a pre-notification if they engage in direct investment or certain activities involving Japanese companies operating in designated industries (Article 27 of the Foreign Exchange Law).
• Following a review, if there is a risk of compromising national security, relevant ministers can recommend or order the modification or suspension of the investment.
• On the other hand, a system exists that exempts foreign investors from pre-notification, provided that specific criteria are met (Article 27-2 of the Foreign Exchange Law).

Who Are Considered Foreign Investors (Article 26, Paragraph 1 of the Foreign Exchange Law)?

Foreign investors mainly include the following. Even subsidiaries of Japanese companies may be considered "foreign investors" in some cases:

• Individuals who are non-residents
• Corporations established under foreign laws (foreign corporations)
• Japanese companies with 50% or more voting rights directly or indirectly held by non-residents or foreign corporations (foreign-owned companies)
• Partnerships where a majority of the general partners are foreign investors (foreign-owned funds)
• Entities where the majority of officers or representative officers are non-residents

What Is Inward Direct Investment (Article 26, Paragraph 2 of the Foreign Exchange Law)?

An inward direct investment that requires pre-notification typically includes the following:

What Are Designated Industries and Core Industries?

1. Designated Industries

- If a company operates even one of the industries requiring pre-notification, it will be subject to pre-notification. Subsidiaries of companies operating in designated industries are also subject to pre-notification.

Designated industries refer to those identified in notifications as related to national security or public order. These industries cover a wide range, including businesses with military applications, medical, electric power, telecommunications, software manufacturing, information processing services, and internet support services.

• Although there are many designated industries, the notice for designated inward direct investment industries contains three tables: businesses in Tables 1 and 2 are designated industries, while those in Table 3 are not.
• Table 1 (PDF: 113KB)
• Table 2 (PDF: 167KB)
• Table 3 (PDF: 323KB)
• The boundaries may not be apparent in the case of IT-related companies. For example, a company selling software applications might fall under software manufacturing. Companies handling third-party information or providing internet-related support services may fall under information processing or internet support services (as noted in Okawa's aforementioned NIBEN Frontier article).
• List of industries requiring pre-notification as of May 2023, issued by the Ministry of Finance
• Weapons and aircraft (including crewless aerial vehicles), space development, and nuclear-related manufacturing (all core industries)
• Manufacturing of dual-use goods with potential military applications (all core industries)
• Manufacturing of pharmaceuticals for infectious diseases and advanced medical devices (all core industries)
• Metal mining and refining related to critical mineral resources, construction of specific remote island port facilities (all core industries)
• Fertilizer imports (potassium chloride, etc.) (all core industries)
• Manufacturing of permanent magnets, materials, machine tools, industrial robots, etc. (all core industries)
• Semiconductor manufacturing equipment (all core industries)
• Manufacturing of energy storage batteries and materials (all core industries)
• Ship components (engines, etc.) (all core industries)
• Metal 3D printers and metal powder manufacturing (all core industries) 
• Cybersecurity-related industries (manufacturing of information processing devices, parts, software, and information service-related industries) (some are core industries)
• Infrastructure-related industries (electricity, gas, water, railways, oil, heat supply, broadcasting, passenger transportation) (some are core industries)
• Security services, agriculture, forestry, fisheries, leather products manufacturing, air and marine transportation (some are core industries)

2. Core Industries

• Some designated industries are core due to their importance to national security. 
• Notification specifying core industries (PDF: 156 KB)
• The Ministry of Finance website publishes a list of listed companies operating in designated and core industries. According to the revised list as of May 19, 2023, out of 3,979 listed companies, 1,975 (50%) operate in designated industries, and 891 (22.4%) operate in core industries.
• List of Japanese listed companies subject to pre-notification under the Foreign Exchange Law
• According to Okawa's aforementioned NIBEN Frontier article, the Ministry of Finance's list of listed companies is only a reference. Relying solely on this list carries risks because the inclusion or exclusion of companies in regulated industries can only partially be determined from external information, making the creation of a comprehensive list impossible. 
• In the lists under "Industries Requiring Pre-Notification" mentioned above, industries marked as "all core industries" are also designated core industries. Industries marked as "some core industries" mean that specific conditions must be met for the business to be categorized as a core industry.

Flow of the Pre-Notification Process

• Preparing the pre-notification documents
• Submission
• Review
• Execution of the investment
• Submission of the execution report

When making an investment in an industry subject to pre-notification, foreign investors must submit a pre-notification through the Bank of Japan to the Minister of Finance and the relevant industry minister within six months before the transaction. From the date the notification is received, the foreign investor is prohibited from conducting the transaction for 30 days in principle, although this period may be shortened to two weeks for less sensitive cases. After the prohibition period ends and the transaction is approved, the foreign investor can acquire shares or other actions.

Although foreign investors are responsible for submitting the pre-notification or post-investment reports if they are non-residents, a resident agent will handle the submission. After the foreign investor acquires or disposes of shares or engages in other activities, they must report to the Ministry of Finance through the Bank of Japan within 45 days.

Pre-Notification Exemption System

Even if foreign investors, inward direct investment, and designated industries meet pre-notification criteria, exemptions may apply if certain conditions are met, allowing for post-investment reporting instead.

1. If the Investment Target Is a Listed Company

Non-core industries 

Suppose a foreign investor (excluding foreign financial institutions) acquires 1% or more of the shares of a listed company engaged in non-core designated industries. In that case, pre-notification is generally exempted if certain exemption criteria (*1) are met.

Core industries

Suppose a foreign investor acquires 1% to 10% of the shares of a listed company engaged in core industries. Pre-notification is generally exempted if the exemption criteria (*1) and additional criteria (*2) are met.

2. If the Investment Target Is Unlisted Stock

Non-core industries 

For inward direct investment in unlisted companies engaged in non-core designated industries, the pre-notification exemption can be applied regardless of the investment ratio, provided that the exemption criteria (*1) are met.

Core industries

For core industries, the pre-notification exemption cannot be applied. (*1) Exemption criteria:

• The foreign investor or their affiliates do not become directors of the issuing company
• The foreign investor does not propose the sale or termination of the business in the designated industry at the general shareholders' meeting
• The foreign investor does not access confidential technical information related to the designated industry

(*2) Additional criteria:

• The foreign investor does not participate in committees with decision-making authority over the core industry's business
• The foreign investor does not submit written proposals to the board of directors with deadlines requiring a response or action regarding the core industry's business

Examples Where Pre-Notification Is Required

• A foreign corporation establishes a non-listed company in Japan to operate an app with a closed chat function. Since the closed chat function falls under the Telecommunications Business Act and telecommunications is a designated industry, pre-notification is required. If the app provides services across multiple municipalities, it may also fall under core industries. The pre-notification exemption system cannot be used for investments in core industries involving unlisted companies.
• Company A, a non-listed company operating a tutoring business, owns Japanese Company A, which develops software. When foreign corporation B, a shareholder of Company A, seeks to enhance its involvement by appointing one of B’s officers as an officer of Company A, pre-notification is required. This is because Company A's subsidiary is engaged in software development, a designated industry. Since the purpose of the investment is to strengthen management involvement, and the exemption criteria are not met, the pre-notification exemption system cannot be used.
• Pre-notification is required if a foreign individual investor living abroad acquires more than one share (including fractional shares) of a non-listed Japanese company that manufactures advanced materials subject to export controls. This is because investment in core industries involving non-listed companies by a foreign resident cannot utilize the pre-notification exemption system.

Post-Investment Reporting

Foreign investors who have submitted a pre-notification must report to the Minister of Finance within 45 days of acquiring or disposing of shares or taking other actions (execution report).

In cases where pre-notification is not required, post-investment reporting is still mandatory. This applies when the investment target does not engage in designated industries or if the pre-notification exemption system is used.

Conclusion

• The key points to consider are whether the investor qualifies as a foreign investor, whether the investment qualifies as inward direct investment, and whether the target business falls under designated or core industries.
• Designated and core industries cover a broad range and are not always clearly defined, so careful attention is required.
• The Ministry of Finance maintains a comprehensive reference site covering laws and notices related to the system. Please start at this page (in Japanese).
• For more information, please refer to my article, Key Decisions for Establishing a Subsidiary in Japan.