TOKYO, Nov. 7, 2025 — Japan is set to revise its key foreign‑investment screening law, changing how overseas capital flows are assessed. Proposed updates to the Foreign Exchange and Foreign Trade Act, or FEFTA, aim to focus scrutiny on strategic and national‑security risks while streamlining the review process. By tightening the definition of high‑risk investments, regulators hope to maintain openness to foreign capital without compromising oversight.

Why Now

The last major amendment to FEFTA took place in 2019 when Japan lowered the mandatory prior‑review threshold for foreign share purchases in designated businesses from 10 percent to 1 percent.

That change triggered a surge of filings from around 500 per year previously to more than 2,000 on average since 2020. The finance ministry now says the system has become stretched and less able to discriminate between low‑risk and genuinely strategic investments.

What Changes Could Be Coming?

Regulators have flagged several specific reform ideas. One is narrowing the range of IT and software firms subject to review so that only those deemed critical for cybersecurity or strategic infrastructure would automatically trigger oversight under FEFTA.

Another is closing loopholes that allow foreign investors to gain control indirectly of Japanese firms by owning foreign entities that then hold Japanese shares, a structure currently outside FEFTA’s scope.

The government is also considering establishing a body modelled on the Committee on Foreign Investment in the United States to coordinate multi‑agency reviews of strategic investment proposals

Who Will Be Affected and How

Institutional investors, corporate boards and compliance organisations will need to pay attention.

Companies in Japan operating in sectors such as cybersecurity infrastructure, IT services, or other industries classified as strategically sensitive may face additional review burdens when accepting foreign investment. Investors who previously structured acquisitions via indirect routes may now find themselves subject to scrutiny.

From a governance standpoint, the evolving criteria mean that boards and investment committees must broaden their due‑diligence frameworks. Rather than focusing solely on financial returns, firms will increasingly need to evaluate strategic‑risk and national‑security implications when entering into foreign ownership or partnership arrangements.

This signals a shift away from the previous assumption that foreign investment is permissible unless flagged. Japan is moving toward a regime where investment subject to strategic‑risk evaluation becomes the default. That raises the bar for compliance programmes, transparency of ownership chains and board oversight of inbound capital.

Next Steps

The revision process is still at an early stage. A draft bill could be submitted in 2026 during Japan’s next ordinary parliamentary session.

Until then, firms should monitor announcements from the Ministry of Finance and the Foreign Investment Screening Panel for guidance on which sectors will be designated as strategic, what thresholds will apply and how indirect acquisition chains will be treated. While the specific terms remain to be finalised, Japan is signalling stronger regulatory measures for foreign investment.

For compliance and governance professionals, this means that what was once a side‑risk is now emerging as a centrepiece of transaction risk management. Boards must ensure that their frameworks are fit for purpose in a world where foreign investment is evaluated not just for its economic impact but for national‑security and strategic‑industry implications.

 

Inputs from Diana Chou

Editing by David Ryder