What can you do with 1 per cent ownership in a company? According to Japan’s proposed new law on foreign direct investment, you can pose a threat to national security, and must therefore notify the authorities of your intentions in advance. While the aim of the new law is legitimate, the proposed threshold of 1 per cent is too low, and it will have to be implemented with great sensitivity to avoid a chilling effect on foreign investment.
Japan’s move is part of a global trend to tighten the rules on foreign investors. Last year’s Foreign Investment Risk Review Modernisation Act in the US grants sweeping powers to review and block foreign acquisitions, of real estate and corporations. The UK is considering whether to press ahead with proposals put forward last year that would expand its powers to block takeovers of sensitive assets. Lurking behind all of these moves is concern about rival powers, notably China, acquiring sensitive technology.
The existing threshold for scrutiny in Japan — 10 per cent — is high by global standards. The new threshold, by contrast, is minimal and the rules apply across a wide range of sectors including aerospace, broadcasting, railway and software companies. Even a small division in a sensitive area could mean a company is caught up in the national security net. With foreign investors in uproar, the authorities have moved to calm market fears. There will be a blanket exemption, they promise, for securities houses buying and selling stock in the course of their daily business, and for foreign banks, insurers and asset managers with no ambition to exercise control over the target company. The finance ministry is also likely to produce a white list of stocks it deems non-security sensitive.