Japan Tightens Foreign Investment Review Under FEFTA, Impacting Inbound M&A

Overview of FEFTA Amendments and Their Impact

Japan's government has intensified its scrutiny of foreign direct investments under the Foreign Exchange and Foreign Trade Act (FEFTA), with 2025 marking the fifth anniversary of significant amendments to the regulatory framework. The tightening reflects a broader global trend of governments strengthening their foreign investment screening mechanisms in response to geopolitical tensions and national security concerns. For inbound M&A activity targeting Japanese companies, the implications have been substantial, adding layers of regulatory complexity that deal practitioners must navigate carefully from the earliest stages of transaction planning.

Prior Notification Requirements and Designated Sectors

Under the current framework, foreign investors must file prior notification before acquiring stakes of 1% or more in Japanese companies operating in designated sensitive sectors. These sectors span a wide range of critical industries, including defense, aerospace, nuclear energy, telecommunications, cybersecurity, and critical infrastructure. The government has progressively expanded the list of designated sectors over recent years, reflecting evolving assessments of what constitutes national security-relevant economic activity. The low 1% threshold means that even relatively modest portfolio investments can trigger the notification requirement if the target company operates in a covered sector, creating compliance obligations for a broad universe of foreign investors.

Lengthening Review Timelines and Heightened Scrutiny

Transaction timelines have lengthened considerably as the Ministry of Finance conducts deeper and more thorough assessments of notified investments. What was previously a relatively streamlined process has become more protracted, with the Ministry requesting additional information and conducting extended consultations with relevant sector regulators. Investors from China and Russia face particularly intensive scrutiny, with reviews often extending to the maximum permissible timeframes. This increased processing time has practical consequences for deal execution, requiring foreign acquirers to build additional regulatory lead time into their transaction schedules and to prepare more comprehensive filing packages at the outset.

The Seven & i Holdings Case and Political Dimensions

The government's handling of the Couche-Tard bid for Seven & i Holdings vividly illustrates the political dimension of FEFTA enforcement. Japan's Minister endorsed the position that a foreign acquisition of the convenience store operator was "heavily related" to national security because convenience store supply chains are critical for disaster response infrastructure. This characterization surprised many observers, as it extended national security reasoning well beyond traditional defense and technology sectors into the realm of consumer retail. The case underscored that FEFTA review outcomes can be influenced by political considerations and public sentiment, adding a layer of unpredictability to the regulatory process for foreign bidders.

Recommendations for Deal Practitioners

Legal advisors recommend conducting a thorough FEFTA analysis at the earliest stages of deal planning for any transaction involving foreign investment into Japan. This includes assessing whether the target company's business activities fall within any designated sector, evaluating the nationality-specific risk profile of the investing entity, and developing a regulatory engagement strategy that anticipates potential government concerns. Given the expanding scope of sectors subject to review and the increasingly rigorous nature of assessments, early and proactive engagement with regulatory counsel has become essential for managing both the timeline and the outcome risk associated with inbound M&A transactions in Japan.