Screening of foreign investment in Japan: Firmly prevent technology leakage

Editorial

14:30 JST, February 4, 2025

Competition between countries over important technologies related to national security is intensifying. It is essential for the government to strengthen its screening of foreign investment in Japanese companies to prevent technology leakage.

Currently, there is a mechanism by which the government screens foreign investment in Japanese companies based on the Foreign Exchange and Foreign Trade Law. This is meant to prevent national security from being threatened by situations such as the leak of domestic technology.

With a 2020 revision of the law, prior notification is required for a foreign entity to acquire 1% or more of the shares of listed companies in fields such as nuclear power, energy, telecommunications and finance, which are important from a security perspective. This is a tightening of measures, as the previous requirement was 10% or more.

At the same time, to prevent foreign investors from shunning Japanese shares, a system has been established to waive prior notification if the investment is a pure investment that does not involve participation in the management of the company.

However, there are concerns that this provision could be used as a loophole. As issues arise, the law must be constantly reviewed.

In fact, it was seen as an issue when a subsidiary of leading Chinese IT company Tencent Holdings Ltd. invested in Rakuten Group Inc., which runs a mobile phone business, in 2021.

Tencent claimed that it was a pure investment, but there were concerns about the leakage of personal information to China.

Therefore, the government will revise the ministerial ordinance for the law. Companies and individuals judged to be at risk of passing on information to foreign governments will be classified as “specified foreign investors,” and will be required to submit advance notification without exception.

For example, it is assumed that companies and individuals who are obliged to cooperate in information disclosure and other matters under the laws, regulations and other conditions of foreign governments will be categorized as specified foreign investors.

Since China obliges cooperation with information gathering under its national intelligence law, it is said that the Japanese government has Chinese companies in mind.

Countries are competing with each other in the development of technologies in such fields as artificial intelligence, drones and quantum computing. It is important for Japan to take measures to prevent the leak of technology in the same manner as the United States and Europe.

It is also possible that Chinese companies will invest in Japanese companies by going through a company in another country. Japan needs to enhance its screening system and focus on detecting such investments.

The new regulation does not apply to unlisted small and midsize companies. However, there is growing concern that Chinese companies are targeting Japanese small and midsize companies that possess superior technologies and actively acquiring them.

From the viewpoint of protecting national interests, the public and private sectors are urged to work together to formulate measures to protect the technology of small and midsize companies.

(From The Yomiuri Shimbun, Feb. 4, 2025)