When a foreign company enters or expands its business in Japan, it should be aware of the regulations on inward direct investment under the Foreign Exchange and Foreign Trade Act (the “FEFTA”).

Under the FEFTA, not only corporations incorporated outside Japan but also certain Japanese companies controlled by foreign investors may be regarded as “Foreign Investors.” Therefore, it is important to determine whether the investing entity falls within this definition.

FEFTA procedures may be required when a Foreign Investor establishes a branch in Japan, acquires shares in a Japanese company, succeeds to a business through an M&A transaction, or extends certain large-scale loans to a Japanese company.

Depending on the target company’s business sector and the investor’s status, either a prior notification or a post-investment report may be required. Prior notification is generally required for investments in designated sectors related to national security, such as defense, semiconductors, software, and critical infrastructure. In such cases, the investment may not be implemented for 30 days after filing, and the authorities may review the transaction and require modifications or suspension if national security concerns arise.

Even where prior notification is not required, a post-investment report may be required for certain investments and must generally be filed within 45 days after completion of the transaction.

Failure to comply with the FEFTA may result in administrative orders, including disposal of acquired shares, as well as criminal penalties. Accordingly, foreign investors should carefully assess whether their proposed investment is subject to FEFTA requirements before commencing business activities in Japan.