Citing security, Japan to plug loophole in reporting rules for foreign investment

By Makiko Yamazaki

TOKYO (Reuters) – Japan’s finance ministry plans to plug a loophole in reporting requirements for foreign investors under the Foreign Exchange and Foreign Trade Act, in an effort to prevent intelligence from leaking to foreign governments.

The step comes as countries look to strengthen control over their economic supply chains after global shocks, including trade tensions between the United States and China.

The planned change, proposed at a finance ministry panel on Thursday, will mandate prior notifications from all foreign investors that might cooperate with foreign governments in collecting intelligence. The requirement kicks in when such a company attempts to acquire 1% or more of firms deemed key to Japan’s national security.

Even though the panel did not name any country in its proposal, the plan will most likely affect Chinese companies, which are required to cooperate with national intelligence work under that Beijing’s 2017 national intelligence law.

Currently, prior notifications for government review are not required for general investors if the purchased stake is less than 10%, with no plans to become involved in management.

The regulatory change could prevent cases such as Chinese tech giant Tencent Holdings’ acquisition of a 3.65% stake in Japanese e-commerce firm Rakuten Group in 2021, which was exempt from prior notification requirements.

Japan’s ruling Liberal Democratic Party (LDP) called for a revision in the exemption criteria last year to enhance scrutiny over foreign investment in designated industries.

The revised regulations could take effect in the first half of this year after public consultation.

(Reporting by Makiko Yamazaki. Editing by Gerry Doyle)

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