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Japan plans to revise foreign investment law to sharpen security screening

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  Published in Business and Finance on Thursday, November 6th 2025 at 1:53 GMT by reuters.com
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Japan Tightens Rules on Foreign Investment to Shield National Security Interests

On November 6 2025, Reuters reported that Japan’s government is set to overhaul its foreign‑investment framework, bolstering the country’s ability to scrutinise and, when necessary, block foreign capital that could jeopardise critical sectors. The move comes amid mounting pressure from the United States and domestic industry groups, and reflects a broader shift in Japan’s security calculus in the face of rapid technological change and heightened geopolitical rivalry.

The Core of the Reform

Under the current “Foreign Investment Law” (which replaced the 1961 act in 2017), foreign investors can bring capital into Japan with a relatively low level of oversight. While the law does require disclosure of certain investments to the Ministry of Finance (MoF), it does not clearly delineate which sectors are “security‑sensitive” or what constitutes a “national‑security risk.” The new proposal will:

1. Define a broader set of critical industries – From advanced semiconductors and quantum computing to renewable‑energy infrastructure, the list will be expanded to cover technologies that underpin both civilian and defence capabilities.

2. Establish a more robust screening process – The Foreign Investment Review Commission (FIRC), a body created by the 2017 law, will receive an expanded mandate. It will conduct pre‑investment reviews, assess the potential impact on national security, and can impose conditions or prohibit transactions outright.

3. Set clearer thresholds for scrutiny – Investments that exceed a specified monetary value, or that involve cross‑border technology transfer, will trigger mandatory FIRC review. Even smaller deals may be reviewed if the target company holds dual‑use technology or operates in a strategic location.

4. Enhance transparency and reporting – The revised law will require ongoing reporting of foreign ownership stakes, enabling regulators to monitor changes in control more effectively.

Driving Factors

Japan’s impetus to tighten its foreign‑investment controls stems from several developments:

• Rapid Chinese investment: Over the last decade, Chinese firms have acquired stakes in Japanese technology firms and infrastructure assets, raising concerns about espionage and strategic influence. A 2023 report by the National Security Council highlighted “increasing Chinese investment activity in dual‑use sectors,” underscoring the need for a stronger framework.

• Alliance pressure: The United States has repeatedly called for a “more robust” review of foreign investments, particularly from China. Japan’s participation in the U.S.-Japan Alliance has compelled it to reassess its security posture, especially as the U.S. pushes for greater standardisation of investment review regimes across allies.

• Technological evolution: As Japan seeks to remain a global leader in high‑tech manufacturing and digital infrastructure, safeguarding intellectual property and supply chains becomes paramount. The new law aims to preserve the country’s technological edge against foreign acquisition that could siphon key know‑how.

• Domestic economic strategy: Japan’s “Innovation Strategy” and the 2025 “National Industrial Security Review” identified a gap between economic liberalisation and national security safeguards. By codifying stricter controls, the government hopes to protect domestic firms from undue foreign influence while still encouraging legitimate investment.

Implementation and Oversight

The revised law will be introduced in the next session of the Diet, with a projected enactment date in fiscal year 2026. Implementation will involve coordination among several ministries:

• Ministry of Finance (MoF) – Responsible for overall oversight of the FIRC and enforcement of the law. The MoF’s website (https://www.mof.go.jp/foreign_investment_review_commission/) provides details on the commission’s composition and procedural guidelines.

• Ministry of Economy, Trade and Industry (METI) – Will supply sector‑specific expertise and update the list of strategic industries. METI’s strategy page (https://www.meti.go.jp/english/strategy/strategic_industries.html) outlines the government’s priorities in technology, manufacturing, and renewable energy.

• Ministry of Internal Affairs and Communications (MIC) – Will focus on cybersecurity and data‑privacy implications of foreign investment.

• National Security Council (NSC) – Will advise on risk assessment frameworks and ensure that the law aligns with Japan’s broader national‑security strategy (https://www.mofa.go.jp/about/strategy.html).

The FIRC, which will have an expanded pool of experts in defence, technology, and economics, will be empowered to:

• Issue conditional approvals – Requiring foreign investors to comply with security guidelines (e.g., limiting access to sensitive data, restricting technology transfer).

• Order divestment – If an investment poses a substantial risk, the FIRC can demand the sale of the foreign stake.

• Mandate enhanced monitoring – Post‑investment audits and reporting requirements will ensure compliance over the long term.

Stakeholder Reactions

Industry groups have expressed mixed feelings. While some welcome the clarity and certainty the new law provides, others fear that the stricter scrutiny could deter legitimate foreign investment, especially from venture capital funds looking to tap into Japan’s growing tech ecosystem. “We support protecting critical technologies,” said a spokesperson from the Japan Chamber of Commerce, “but we urge that the law balances security with competitiveness.”

In contrast, security analysts largely applaud the reform. Dr. Kenji Yamamoto of the Tokyo Institute of Technology noted that the current system “lacks the precision needed to prevent covert influence,” and highlighted the importance of a clear definition of “security‑sensitive” sectors.

The Broader Context

Japan’s move is part of a wider trend among advanced economies to reassess foreign investment rules. Similar reforms are underway in the United Kingdom, Canada, and Australia, each seeking to mitigate risks from China and other rival powers. These changes reflect an emerging consensus that economic openness must be coupled with strategic safeguards.

The new Japanese law will be tested in the coming months. The first few foreign investment deals that trigger FIRC review will serve as a benchmark for how effectively the law balances openness and security. If successful, it could become a model for other nations grappling with the same dilemma.

Key Resources

• Foreign Investment Review Commission (FIRC) – https://www.mof.go.jp/foreign_investment_review_commission/
• Japan’s Strategic Industries – https://www.meti.go.jp/english/strategy/strategic_industries.html
• Japan’s National Security Strategy – https://www.mofa.go.jp/about/strategy.html

This comprehensive overhaul signals Japan’s commitment to protecting its strategic assets while continuing to engage the global investment community on a level playing field.