On January 7, 2026, the Council published the Report on the appropriate design of Japan’s foreign direct investment screening regime¹. The Report sets out the direction for amending the framework, prompted by the fact that five years have elapsed since the 2020 amendments to FEFTA took effect². A bill reflecting the Report is expected to be submitted during the current ordinary session of the Diet.

This newsletter summarizes the direction of the anticipated amendments and considers their practical implications. For convenience, we group the Report’s proposals under three pillars: (i) streamlining the screening process and ensuring effectiveness, (ii) strengthened regulation in response to changes in the national security environment, and (iii) enhancement of enforcement capacity and information dissemination.

From a practical standpoint, two proposals are likely to be particularly consequential: (a) the introduction of regulation of certain indirect acquisitions (Section Ⅲ.1. below) and (b) the introduction of call-in powers for certain investments in non-designated businesses (Section Ⅲ.3. below).

Against the backdrop of a sharp increase in the number of prior notifications in recent years (2,903 cases reviewed in FY2024), the Report proposes measures to exclude lower-risk categories of investment from the prior notification requirement. 

For example, while certain appointments of directors and statutory auditors require prior notifications under the current regime, the Report proposes that prior notification should not be required for a foreign investor’s exercise of voting rights with respect to the reappointment of certain directors or statutory auditors³ where there have been no material changes in circumstances since the previous appointment. It also proposes limiting the scope of designated businesses in the information and communications technology–related sectors⁴ to those that are truly necessary from a cybersecurity perspective. In addition, the Report recommends verifying whether prior notification obligations are currently imposed on any investor attributes or conduct categories that present low national security risk, and rationalizing the regime accordingly.

At the same time, the Report suggests examining whether investments in Japanese companies holding important technologies or information are adequately captured by the current prior notification regime. Accordingly, even as rationalization proceeds, there remains a possibility that additional designated businesses may be added in parallel.⁵

Overall, the Report points toward narrowing the scope of the prior notification obligation. If implemented, this should reduce compliance burdens for foreign investors and Japanese issuers to some extent.

(1) Current Practice and Issues
(a) Overview of current practice
In practice, during FEFTA prior notification reviews, where national security concerns remain, it has become common for authorities and foreign investor to agree on risk mitigation measures in exchange for clearance, rather than for the authorities to resort to a formal order to modify or discontinue the investment.

Specifically, during the review, the competent ministry often provides draft language for risk mitigation measures, and the foreign investor negotiates the language with the authorities. Once agreement is reached, where a prior notification has already been filed, the foreign investor typically withdraws the notification and refiles it with the agreed risk mitigation measures incorporated and described in the new notification. After refiling, clearance is often obtained within five business days.

The authorities have taken the position that, if a foreign investor violates the risk mitigation measures recorded in the notification, this may be treated as a “false” notification, potentially subjecting the party to a corrective order.⁶

(b) Issues with current practice
The current practice presents practical issues for both foreign investors and the authorities. These issues largely stem from the fact that FEFTA does not expressly provide for a statutory mechanism for risk mitigation measures and that such measures have been treated as voluntary statements by the foreign investor in the notification.

For foreign investors, once risk mitigation measures are agreed, they must withdraw and refile the prior notification. As a matter of law, the refiling triggers a new statutory waiting period, leaving the investor without certainty as to when clearance will be issued. While, in practice, clearance is generally obtained within five business days after refiling, time-sensitive transactions may still be exposed to unnecessary additional delay.

For the authorities, there are also statutory and enforcement challenges, including: (i) whether a breach of agreed measures can necessarily be characterized as a “false” notification (for example, where the foreign investor intended to comply at the time of refiling but later breached the measures), and (ii) whether the statutory framework for corrective orders relating to false notifications—under which the authorities may order “necessary measures”⁷—extends to orders requiring the disposition of shares or equity interests, particularly when compared with corrective orders for failures to file, where the statute expressly refers to “disposition of all or part of the shares or equity interests and other necessary measures.”⁸

(2) Recommendations in the Report
(a) Addressing issues for foreign investors
Recognizing the increasing importance of risk mitigation measures, the Report recommends clarifying the mechanism in FEFTA to enhance predictability for foreign investors.

Specifically, the Report proposes adding a dedicated item for risk mitigation measures to the prior notification form, requiring the foreign investor to describe such measures where they will be undertaken. It also proposes allowing the submission of a filing to add or amend risk mitigation measures without requiring withdrawal and refiling of the initial notification (i.e., the statutory waiting period for the already-filed notification would continue to apply). ⁹

These measures are expected to improve what has been an opaque practice from a legal perspective and may also modestly shorten the overall time to clearance in cases where risk mitigation measures are required.

(b) Addressing issues for the authorities
The Report also proposes strengthening mechanisms to ensure compliance with risk mitigation measures. Under the current regime, based on the screening outcome, the Minister of Finance and the competent minister(s) may recommend or order a change to, or discontinuation of, an investment. The Report further recommends expressly permitting recommendations or orders that are conditioned on the implementation of specified risk mitigation measures.¹⁰ 

In addition, where a foreign investor wishes to change or obtain a waiver from agreed risk mitigation measures after making an investment, the Report proposes introducing a mechanism requiring a prior amendment filing and a re-review. The Report also proposes that if the investor fails to implement the risk mitigation measures, the authorities should have the power to  issue an order requiring the disposition of the acquired shares.¹¹ The Report also calls for guidelines providing categories and concrete examples of what may constitute risk mitigation measures, to improve predictability for investors.

By codifying the enforcement framework for breaches of risk mitigation measures, the Report appears intended to address the authorities’ existing interpretive and enforcement challenges.

(1) Current Regulations and Their Issues
FEFTA requires prior notification for certain transactions that fall within the statutory definitions of “Inward Direct Investment, etc.” and “Specified Acquisition,” in specified circumstances. These categories generally focus on direct acquisitions of shares or similar interests in Japanese companies. Accordingly, the acquisition of shares in a foreign entity that holds shares in a Japanese company (an “Indirect Acquisition”) is not currently subject to FEFTA screening.

We have observed, some transactions where authorities attempted to address this gap through risk mitigation measures imposed as part of the clearance of a direct acquisition of a Japanese company’s shares (for example, obligations to report on, or obtain consent for, changes in ownership of the foreign entity holding the Japanese company’s shares). However, given (i) the lack of clear statutory footing for risk mitigation measures and (ii) the fact that such measures effectively seek to regulate Indirect Acquisitions that FEFTA does not directly cover, the effectiveness and enforceability of these arrangements may be open to question.

(2) Recommendations in the Report
The Report recommends bringing certain Indirect Acquisitions within the scope of FEFTA prior notification.

Specifically, it proposes adding to the definition of “Inward Direct Investment, etc.”: (i) acquisitions by a foreign investor of 50% or more of the voting rights of a foreign entity that directly holds voting rights or other equity interests in a Japanese company (a “Direct Holder”), (ii) arrangements under which affiliates of the foreign investor constitute a majority of the directors of the Direct Holder, and (iii) other similar arrangements. As a result, an Indirect Acquisition of a Japanese company through the acquisition of voting rights or other interests in a Direct Holder would also require prior notification where the Japanese company operates designated businesses.

The Report further distinguishes between “High-Risk Foreign Investors” (i.e., foreign investors not eligible for the prior notification exemption regime) and other foreign investors. Under the Report, for Indirect Acquisitions by High-Risk Foreign Investors, the filing requirement would apply broadly where the Direct Holder holds 1% or more of the voting rights or other interests in a Japanese company operating designated businesses. For other foreign investors, the Report indicates a policy of limiting the filing requirement to cases where the Direct Holder holds 50% or more of the voting rights or other interests in such a Japanese company. Accordingly, depending on whether the investor is categorized as “high-risk,” the threshold for the filing requirement would differ materially (1% versus 50%).¹² 

To enhance the effectiveness of the Indirect Acquisition regime, the Report also proposes: (i) requiring the Direct Holder to make an ex post report when changes occur in its parent company or similar controlling entities, and (ii) enabling the authorities, where an order directed at the indirect acquirer would not adequately address national security risks, to issue an order directly to the Direct Holder requiring necessary measures.

(3) Practical Implications
(a) Impact on High-Risk Foreign Investors (including Chinese-linked investors)
Examples of “High-Risk Foreign Investors” include investors that have been subject to FEFTA enforcement within the preceding five years, foreign governments, and state-owned enterprises.¹³ Of particular practical significance, this category also includes certain persons or entities obligated to cooperate with foreign governments in information-gathering activities, as well as their subsidiaries (together, “Information-Gathering Obligors”).

The concept of Information-Gathering Obligors was introduced through amendments to the relevant Cabinet Order and related regulations that took effect on April 4, 2025. While the relevant materials and public comments did not expressly specify targeted jurisdictions, it is generally understood that the authorities had in mind persons and entities subject to China’s National Intelligence Law and their subsidiaries. Accordingly, Chinese individuals and entities, and their subsidiaries, may be interpreted as falling within the category of High-Risk Foreign Investors.

As a result, not only sovereign wealth funds and other government-linked investors, but also Chinese individuals and entities (and their subsidiaries), may become subject to the Indirect Acquisition filing requirement in a broad range of scenarios. In particular, where such an investor undertakes a transaction involving a transfer of control over a Direct Holder, and the Direct Holder holds 1% or more of the voting rights or other interests in a Japanese company operating designated businesses, the Indirect Acquisition regime may apply.¹⁴

(b) Impact on foreign investors other than High-Risk Foreign Investors
For foreign investors other than High-Risk Foreign Investors, the Indirect Acquisition filing requirement is expected to be limited to transactions involving a transfer of control over a Direct Holder where the Direct Holder holds 50% or more of the voting rights or other interests in a Japanese company operating designated businesses. While the scope would be narrower than that for High-Risk Foreign Investors, the requirement will be widely relevant in non-Japanese M&A involving a foreign target with a Japanese subsidiary, even where the transaction is between entities incorporated in the same jurisdiction.¹⁵

Accordingly, even with respect to M&A targeting a non-Japanese entity, parties may need to confirm, as part of due diligence, whether the target group includes a Japanese subsidiary and, if so, whether that Japanese company operates designated businesses. Transaction documents may also need to include, as a condition precedent, the expiration of the FEFTA waiting period following any required prior notification.

The Report also recommends measures to address attempts to circumvent FEFTA regulation.

Under the current regime, FEFTA contains an anti-circumvention provision under which a non-foreign investor who makes an investment for the benefit of a foreign investor without using that foreign investor’s name is deemed to be a foreign investor for purposes of FEFTA and is subject to the relevant regulations.¹⁶

The Report proposes expanding this concept to cases where, under the control or influence of a foreign investor, a non-foreign investor is recognized as investing in substance as part of a unified investment activity. The Report provides examples, including: (i) investing based on a contract or similar arrangement and following instructions from a foreign investor; (ii) a person in a “special relationship” with a foreign investor (including an employment relationship, kinship, or an enduring economic relationship) investing following such instructions; and (iii) a person in a special relationship investing for the purpose of transferring designated businesses or providing technology to a foreign investor.

However, the Report also indicates that these additional anti-circumvention provisions should be limited to cases where the non-foreign investor is under the control or influence of a High-Risk Foreign Investor. Accordingly, the impact on foreign investors other than High-Risk Foreign Investors is expected to be limited.

(1) Current Regime and Recommendations in the Report
The Report recommends granting the authorities call-in powers with respect to certain investments in non-designated businesses—i.e., investments that have been outside the scope of prior screening.

Under the current regime, investments by foreign investors in Japanese companies that do not operate designated businesses are not subject to prior notification; instead, only an ex post report is required for acquisitions of 10% or more of shares, equity interests, or voting rights. Such investments are not currently subject to measures such as recommendations or orders.

The Report states that, even for investments not subject to prior notification, there is a need to respond if, after execution, a national security risk arises due to changes in international circumstances or other reasons. It therefore proposes that, for investments by High-Risk Foreign Investors, where it becomes necessary to confirm whether an investment falls within a category highly likely to pose a national security risk, the authorities should be able to require a report. Based on such report, if the investment is found to present a material national security risk, the authorities should be able—similar to the prior notification screening process—to recommend or order necessary measures, including risk mitigation measures and the disposition of shares.

Accordingly, while described as “call-in powers,” the envisioned process would generally involve two steps: (i) a request for reporting and (ii) a determination of whether call-in is warranted. At the same time, the Report also proposes that, in exceptional cases where the national security risk is extraordinarily high and urgent measures are necessary, the authorities should be able to order necessary measures without first going through the recommendation process—meaning that call-in powers without a prior reporting request cannot be ruled out.¹⁷

(2) Practical Implications
The Report contemplates limiting the scope of call-in powers to acquisitions by High-Risk Foreign Investors of 10% or more of shares or voting rights in Japanese companies that do not operate designated businesses, and also considering a limitation period for retroactive call-in (around five years, referencing foreign regimes). Accordingly, the impact on foreign investors other than High-Risk Foreign Investors is expected to be limited.

For High-Risk Foreign Investors, however, even investments that do not require prior notification would carry ongoing call-in risk. The Report does not state whether a voluntary pre-screening mechanism would be made available in connection with call-in powers. It will therefore be important to monitor whether a voluntary review process is introduced in practice.

The Report emphasizes that enhancing the effectiveness of Japan’s foreign direct investment screening regime requires not only institutional reform but also improvements in enforcement and implementation. In particular, to address economically and strategically important cases, the Report calls for close inter-agency coordination and recommends strengthening statutory cooperation provisions in anticipation of the possible establishment of a “J-CFIUS,” which is currently under discussion within the government. Specifically, the Report suggests forming an inter-ministerial screening team that includes not only the Ministry of Finance and the competent ministries but also the National Security Secretariat (NSS), thereby pooling expertise across agencies.

That said, even under current practice, it is generally understood that the Ministry of Finance and the competent ministries do not conduct screening in isolation. The process is typically coordinated by the Ministry of Finance, with the competent ministries proceeding while informally taking into account the views of relevant agencies. Accordingly, from the perspective of foreign investors, these institutional proposals may not immediately result in major practical changes.

The Report also recommends strengthening post-transaction monitoring (including increasing personnel) and enhancing information dissemination to foreign investors and Japanese companies. From the perspective of foreign investors, a particularly important point is the proposed introduction—by FY2028—of a new system for submitting prior notifications, ex post reports, and related filings. Currently, electronic filings are made using the Bank of Japan’s online system; depending on the details of the new system, it may reduce procedural burdens and accelerate review processes.

The Report provides a clear indication of the direction of the upcoming amendments to FEFTA, and is an important reference point for understanding the direction of reform.

Foreign investors considering investments into Japan; Japanese companies considering accepting foreign investment; Japanese companies considering the sale of subsidiaries to foreign investors; and foreign investors considering M&A transactions involving foreign companies that hold shares in Japanese companies should continue to monitor developments closely, as the proposed reforms could materially affect M&A transactions.